As filed with the Securities and Exchange Commission on August 21, 1996
Registration No. 333-3581
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-1
Registration Statement Under
The Securities Act of 1933
ADVANCED FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of (Primary Standard
incorporation or organization) Industrial Classification)
Code Number)
84-1069415
(IRS Employer Identification No.)
5425 Martindale, Shawnee, KS 66218
Tel. (913) 441-2466
(Address, including zip code, and telephone number,
including area code, or registrant's principal executive offices)
Norman L. Peterson, President
Advanced Financial, Inc.
5425 Martindale
Shawnee, KS 66218
(913) 441-2466
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Allen G. Reeves, Esq.
Allen G. Reeves, P.C.
900 Equitable Building
730 17th Street
Denver, CO 80202
(303) 534-6278
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
================================================================================
Title of each Proposed Proposed
class of maximum maximum
securities offering aggregate Amount of
to be Amount to be price per offering registration
registered registered share price(1) fee
- --------------------------------------------------------------------------------
Common Stock 1,000,000 $ .50 $ 500,000 $172.40
$.001 par
value(2)
================================================================================
(1) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457, based on the average of the high and low price of
the registrant's common stock in the consolidated reporting system on
the American Stock Exchange on April 24, 1996.
(2) Issuable upon exercise of stock options.
This Registration Statement also covers, pursuant to Rule 416, any
additional shares of Common Stock which may become issuable by reason of the
anti-dilution provisions of the stock options and Class B Warrants.
-----------------------------------------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
ADVANCED FINANCIAL, INC
CROSS REFERENCE SHEET
Form S-1 Item Numbers and Caption Heading in Prospectus
1. Forepart of the Registration Statement and
Outside Front Cover of Prospectus........... Cover Page of Form S-1 and
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................. Inside Front and Outside
Back Cover Pages of
Prospectus
3. Summary Information, Risk Factors............ Summary Information and
and Ratio of Earnings to Fixed Charges Risk Factors
4. Use of Proceeds.............................. Cover Page of Prospectus;
5. Determination of Offering Price.............. Not Applicable
6. Dilution..................................... Not Applicable
7. Selling Security Holders..................... Selling Stockholders
8. Plan of Distribution......................... Cover Page of Prospectus
9. Description of Securities to be Registered... Description of Capital
Stock of the Company
10. Interests of Named Experts and Counsel....... Legal Matters and Experts
11. Information With Respect To The Registrant.... The Company, Selected
Financial Data, Manage-
ment's Discussion and
Analysis of Results of
Financial Condition;
Management; Certain
Transactions
12. Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities............................. Indemnification
13. Other Expenses of Issuance and Distribution... Part II
14. Indemnification of Directors and Officers..... Part II
15. Recent Sales of Unregistered Securities....... Part II
16. Exhibits and Financial Statement Schedules.... Part II
17. Undertakings.................................. Part II
<PAGE>
PROSPECTUS
1,000,000 Shares
Common Stock
ADVANCED FINANCIAL, INC.
The 1,000,000 shares of $.001 par value common stock ("Common Stock") of
Advanced Financial, Inc. (the "Company") offered hereby are offered by certain
shareholders of the Company (the "Selling Shareholders"). See "Selling
Shareholders". The Company will not receive any of the proceeds from the sale of
shares by the Selling Shareholders.
The Company's common stock has been traded on the American Stock Exchange
since March 29, 1993 under the symbol AVF. On August 7, 1996, the stock had a
market price of $1.25.
The Company has been advised by the Selling Stockholders that the shares
may be offered and sold from time to time by or on behalf of the Selling
Stockholders, in or through transactions or distributions, (including crosses
and block transactions) on the American Stock Exchange at market prices
prevailing at the time of sale, or at negotiated prices, and in connection
therewith commissions may be paid to brokers. Brokers participating in such
transactions may act as agents for the Selling Stockholders. The Selling
Stockholders, and any brokers participating in this offering, may be deemed to
be "underwriters" within the meaning of the Securities Act of 1933, and any
commissions received by them may be deemed to be underwriting compensation.
------------------------------------
THE SHARES OFFERED HEREBY INVOLVE A
HIGH DEGREE OF RISK. SEE "RISK
FACTORS".
-------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1996.
1
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith is required to file reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information concerning the Company can be inspected
and copied at the Public Reference Room maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C., 20549. Copies of this material
may also be obtained from the Public Reference Section of the Commission, 450
Fifth Street N.W., Washington, D.C. 20549, at prescribed rates. Reports, proxy
statements and other information concerning the Company can also be inspected at
the offices of the American Stock Exchange, Inc., 86 Trinity Place, New York,
New York 10006.
The Company has filed with the Commission a Registration Statement under
the Securities Act of 1933 with respect to the securities offered by this
Prospectus. This Prospectus does not contain all the information set forth in
the Registration Statement certain parts of which are omitted in accordance with
the rules of the Commission. For further information with respect to the Company
and the securities offered hereby, reference is made to the Registration
Statement including the exhibits. Statements contained in this Prospectus as to
the contents of any contract or other document are not necessarily complete and,
where the contract or other document has been filed as an exhibit to the
Registration Statement each such statement is qualified in all respects by
reference to the applicable document filed with the Commission.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon written
or oral request of such person, a copy of any or all of the information that has
been incorporated by reference in this Prospectus (other than exhibits).
Requests should be directed to the Company at its principal executive offices,
5425 Martindale, Shawnee, Kansas 66218, telephone (913) 441-2466.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements appearing elsewhere in this Prospectus.
The Company
Advanced Financial, Inc. (the "Company") is a publicly traded Delaware
company formed in June 1988. In July 1990 the principals of the Company
recognized an opportunity existed in the mortgage servicing industry due to the
collapse of the savings and loan industry. On March 29, 1991 the Company was
2
<PAGE>
successful in acquiring Creative Financing, Inc. as a wholly owned subsidiary.
In 1992, this subsidiary changed its name to Continental Mortgage, Inc. The name
was again changed due to expansion into additional states, to AFI Mortgage, Corp
("AFIM") in November 1994. AFIM is a mortgage banking company servicing
approximately $439,000,000 in mortgage loans as of June 30, 1996.
The Company's common stock has been traded on the American Stock Exchange
since March 29, 1993 under the symbol AVF. On August 7, 1996, the stock had a
market price of $1.25.
The Company's principal executive offices are located at 5425 Martindale,
Shawnee, Kansas 66218. Its telephone number is (913) 441-2466.
Summary Financial Data
The following summary financial data has been derived from the financial
statements of the Company and should be read in conjunction with such financial
statements.
<TABLE>
<CAPTION>
Three Months Three Months Year Ended Year Ended
Ended Ended March 31 March 31
June 30, 1996 June 30, 1995 1996 1995
------------- ------------- ---- ----
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $1,662,485 $1,600,195 $ 6,891,328 $ 5,481,199
Expense 2,224,615 2,287,549 10,026,555 10,295,464
Net Loss ( 562,130) ( 687,354) (3,184,577) (3,963,497)
Weighted Average Shares 3,819,000 3,775,000 3,776,000 3,726,000
Earnings (loss) per Share ( .15) ( .19) ( .88) ( 1.11)
BALANCE SHEET DATA:
June 30,
1996
-----------
Total Assets $19,680,902
Total Liabilities 19,264,703
Stockholders' Equity 416,199
</TABLE>
RECENT EVENTS
On February 15, 1996, the Company entered into consulting agreements with
Ocean Marketing Corporation, a Colorado corporation; and three Delaware
corporations, Cored Capital Corporation, Pyramid Holdings, Inc., and Affiliated
Services, Inc. Under the terms of each agreement, the Company is to be provided
with financial and public relations services, including advice concerning
marketing surveys, investor profile information, methods of expanding investor
support and increasing investor awareness of the Company and its products and
services. The above named consultants are also to provide services to the
Company, including broker relations, assisting in the preparation and format of
3
<PAGE>
due diligence meetings, and attendance at conventions and trade shows. The term
of each consulting agreement is six months, commencing on February 15, 1996. As
compensation for each consultant's services, the Company has granted an option
to purchase 250,000 shares of common stock to such consultant at an exercise
price of $.50 per share. With respect to options granted to Affiliated Services
and Pyramid Holdings, such options expire, if not previously exercised, thirty
days after a registration statement covering the shares underlying such options
has been declared effective by the Securities and Exchange Commission. None of
such options have been exercised as of the date of this Prospectus. Any shares
issued upon exercise prior to the effectiveness of such registration statement
shall be restricted securities as described in Rule 144 promulgated under the
Securities Act of 1933. With respect to options granted to Cored Capital
Corporation and Ocean Marketing Corporation, such options were to have expired,
if not previously exercised ten days after a registration statement which
registered the shares for sale underlying such options was filed with the
Securities and Exchange Commission. However, prior to their expiration, the
parties mutually agreed to extend the expiration date of such options for an
indeterminate period of time. Thereafter, Cored Capital Corporation exercised
options on 130,000 shares of common stock and Ocean Marketing Corporation
exercised options on 250,000 shares of common stock in June of 1996.
In January of 1996, the Company defaulted in the payment of its regular
quarterly dividend payable on its 10.5% Series B Convertible Preferred Stock.
All dividends not paid will accumulate until such time as the Company has
determined that its cash flows have improved enough to sufficiently pay the
dividend from the cash flow of its operations. The total arrearage is three
quarterly payments totaling $117,180 and interest does not accrue on such
arrearage.
RISK FACTORS
The common stock offered hereby involves a high degree of risk, including,
but not necessarily limited to the risk factors described below. Each
prospective investor should carefully consider the following risk factors
inherent in and affecting the business of the Company and this offering before
making an investment decision.
1. Continued Operating Losses. The Company has experienced large operating
losses recently. For example, for the three months ended June 30, 1996, the
Company incurred a loss before income taxes of $562,130 compared to a loss
before income taxes of $687,354 for the three months ended June 30, 1995.
Further, in the year ended March 31, 1996, the Company had a loss before income
taxes of $3,135,227. During the year ended March 31, 1995, the Company
experienced a loss before income taxes of $4,814,265.
4
<PAGE>
While the Company has narrowed its losses and expects to see improvement in cash
flow for the fiscal year 1997, there can be no assurance that operating losses
will not continue into the foreseeable future. See "Management Discussion and
Analysis".
2. Possible Early Termination of Loan Servicing Fees. The purchase price
the Company paid to acquire loan servicing portfolios was based in part on the
Company's expectation of the rate that borrowers will make prepayments on these
loans. In the event such loans are prepaid, generally either as a result of the
re-financing or sale of the property associated with the loan, the loan
servicing fees are terminated. In evaluating the price paid for a loan servicing
portfolio, the Company generally assumed a prepayment rate of 12 to 30% per
annum rather than the historical prepayment rate of 6% to 8% as described above.
While the Company believes its valuation process is conservative with respect to
prepayment expectations, there is no assurance that prepayments will not exceed
expectations, thus lowering yields the Company could expect to receive from its
loan servicing portfolios. For example, the Federal National Mortgage
Association ("FNMA") has reported that its prepayment rate for loans of similar
characteristics as those of the Company had gone from 11% at the start of 1995
to 17% in June of 1996. The rate of prepayment is directly related to the
interest rate of the note to be prepaid. The lower the interest rate, the lower
the prepayment rate. The Company, as of June 30, 1996, had an average interest
rate on loans it serviced of 9.03%. To the extent the Company sells all or a
portion of its servicing portfolio to retire related indebtedness or to raise
additional capital, it is expected that loan servicing fees would decline as the
loan servicing portfolio is liquidated.
3. Risk of Loan Defaults. The Company cannot generate servicing fees from
defaulted loans, since defaulted loans do not generate cash flows. The Company
has not seen any unanticipated increase in the default rate associated with its
loan servicing portfolios. However, there can be no assurance that the loan
default rate will not accelerate, thus increasing the risk that the Company will
generate less revenue from its servicing rights, and experience increased costs
associated with such loans.
4. Risks Associated with Changes in Resale Markets and Loss of Status as
Approved Servicer. The Company's business depends in part on its ability to sell
to investors mortgage loans that it originates or purchases. Accordingly, any
significant change in the secondary mortgage market, including the operations,
level of activity or underwriting criteria of FNMA or the Federal Home Loan
Mortgage Corporation ("FHLMC"), could have an adverse effect on the Company's
business and results of operations. In addition, sellers and servicers of
mortgage loans held by FNMA and FHLMC must comply with the FNMA and FHLMC
seller/servicer guides, including criteria relating to maintaining minimum net
worth levels. Recently it was ascertained that the Company's FHLMC principal and
5
<PAGE>
interest custodial account was short approximately $680,000. The account is to
be funded with proceeds from the sale of the related servicing. The Company has
identified approximately $255,000 of such shortage which has been reflected in
accounts payable and accrued expenses in the Company's consolidated balance
sheet at June 30, 1996. The remaining shortage arose from shortages in the
previous servicers' custodial accounts that was transferred to the Company when
the servicing rights were purchased from such servicers. The Company has made a
claim for approximately $75,000 to FHLMC for penalties and interest and plans to
file claims against the previous servicers for the remaining shortage. If the
Company is unsuccessful in asserting its claims against previous servicers, the
Company would then be required to expense any remaining shortage in an amount of
as much as $350,000 depending upon the success of the Company's efforts in
asserting such claims. If the Company fails to comply with the seller/servicer
guides, its approval as a seller/servicer could be withdrawn and its servicing
rights could be transferred to another servicer without compensation to the
Company. As of March 31, 1996, the Company fell below the GNMA and FHA net worth
guidelines. These agencies have been notified that the Company is not currently
in compliance. Normally, such agencies would be expected to send a letter
outlining the deficiencies and requiring the Company to submit a plan outlining
how the Company expects to come back into compliance with such net worth
requirements. To date, the Company has not received any documentation from any
of the applicable entities requiring the submission of such a plan.
Nevertheless, the Company is currently attempting to raise additional equity
capital to come back into compliance with these net worth requirements. If the
Company is ultimately unable to meet these net worth requirements, it is likely
that the Company will be precluded from doing business with such entities, which
could have a negative impact on the ability of the Company to profitably conduct
its business. See "Management's Discussion and Analysis or Plan of Operation
Financial Position" and "Business - Regulation".
5. Greater Resources of Competitors. The mortgage banking industry is
competitive and competition is based heavily on price. Many of the Company's
competitors have greater financial resources than does the Company and
consequently may be able to achieve economies of scale that are unavailable to
the Company. There is no assurance that the Company will be a successful
competitor in its industry.
6. Risks Associated with Recourse Obligations. A portion of the servicing
rights held by the Company relate to mortgage loans sold "with recourse", which
means that if a loan serviced by the Company is foreclosed, the Company will be
obligated to repurchase the loan from the loan investor, dispose of the property
subject to the mortgage and absorb any shortfalls between the unpaid amount of
the loan (including interest and expenses) and the sale price of the property.
Of the approximately $439,000,000 of mortgage loans serviced by the Company at
June 30, 1996, 3.75% were with recourse to the Company. Should the Company's
current portfolio of mortgage loans serviced with recourse have an unexpected
large level of foreclosures, the Company might be unable to meet its recourse
6
<PAGE>
obligation. Furthermore, the Company might experience losses upon foreclosure
and ultimate sale of foreclosed properties. As of June 30, 1996, the Company had
loss reserves of $280,000 relating to loans sold with recourse servicing. The
Company has not set aside any funds in order to cover its potential obligation
to repurchase recourse loans. The Company's current policy is to only purchase
or retain servicing rights without recourse. However, the Company may change
this policy in the future.
7. Cyclical Nature of the Industry. As a result of its sensitivity to
interest rate fluctuations and other economic conditions, the mortgage banking
industry tends to experience cycles of greater and lesser activity and
profitability. For example, during the mid-1980's, when interest rates declined
sharply and the housing market was very strong, the mortgage banking industry
experienced significant growth and profitability; during the late 1980's, when
interest rates rose and the housing market declined, the mortgage banking
industry experienced retrenchment and lower profitability.
8. Risks Associated with Representations and Warranties Assumed or Made by
the Company. When a mortgage loan originator or purchaser sells a mortgage loan
to FNMA, FHLMC or private investors, it makes certain representations and
warranties relating to the mortgage loan, including representations and
warranties as to the compliance by the originator or purchaser with applicable
underwriting guidelines. A purchaser of the rights to service the mortgage loan
becomes obligated to the investor with respect to the accuracy of these
representations and warranties, and, if these representations and warranties are
incorrect, the investor may require the servicer to repurchase the mortgage
loan. Any loss resulting from a material inaccuracy in the representation or
warranty would fall on the servicer. The Company attempts to limit its exposure
to this risk through due diligence of mortgage portfolios prior to acquisition
and by negotiating appropriate representations and warranties and
indemnification from entities from which it acquires mortgage servicing rights.
In the ordinary course of business the Company makes representations and
warranties to the purchasers of servicing rights and purchasers and insurers of
mortgage loans. Any loss resulting from a material inaccuracy in these
representations and warranties would fall on the Company. There is no assurance
that a breach or breaches of such representations or warranties would not have
an adverse effect upon the Company.
9. Risks Associated with Loan Servicing Rights. The Company typically
purchases loan servicing rights; in addition, it may from time to time elect to
accept a lower price for loans that it originates in return for selling those
loans while retaining the related servicing rights ("servicing retained"). In
each such case, the Company's decision is based on its estimate of the market
value of the servicing rights purchased or retained, which in turn
7
<PAGE>
is based on the estimated present value of future cash flow from such rights.
Various events, such as a higher than anticipated rate of default or prepayment
on the loans as to which the Company has servicing rights, could adversely
affect the value of and earnings from those rights. Many of the events that
could have such an effect are likely to be caused by conditions beyond the
control of the Company. There is no assurance that the Company's assessment of
the value of servicing rights purchased or retained by it will prove to be
justified. The Company makes provisions for accelerated prepayment experience
from time to time.
10. Risks Associated with Fluctuating Interest Rates. The Company's
operations and the value of its assets are sensitive to interest rate
fluctuations in several ways. An increase in interest rates may have an adverse
effect on the market value of the Company's fixed rate loan originations and
purchases. Conversely, a significant decrease in interest rates could provide an
incentive to borrowers to refinance loans as to which the Company has servicing
rights, thereby reducing the value of and earnings from those assets. Such
financing might be accelerated in the event of a general economic recovery,
which could result in, among other things, an increase in the market value of
the collateral securing loans and the greater availability of credit. Higher
interest rates can have a negative impact on housing markets, reducing the
market value of the collateral securing loans in the Company's loan portfolio or
with respect to which the Company has a recourse obligation. Fluctuating
interest rates may affect the net interest income earned by the Company because
the Company typically earns interest income on fixed rate mortgage loans and
incurs interest expense on a variable basis. Fluctuations in the prime rate (on
which the Company's interest cost is based) may not parallel fluctuations in
mortgage interest rates. Although the Company's current policy is to obtain
commitments from investors prior to closing loans, thereby diminishing the
effect of fluctuating interest rates on its loan portfolio and net interest
income, the Company has at various times held, and in the future may hold, a
significant amount of uncovered loans.
11. Dependence on Existing Management. The success of the Company has been
dependent upon its existing management, including Norman L. Peterson and William
E. Moffatt. The loss of the services of either of them could have an adverse
effect upon the Company if suitable replacements cannot be quickly retained. The
Company does not have an employment agreement with Mr. Peterson. See
"Management". The Company has not obtained "key man" life insurance policy on
either of these individuals.
12. Control By Management. The Company's officers and directors currently
own approximately 35.1% of the Company's outstanding Common Stock and are in a
position to effectively control the Company.
8
<PAGE>
13. Potential Future Sales Pursuant to Rule 144. Immediately prior to the
date of this Prospectus, a total of 1,360,477 shares of the Company's
outstanding Common Stock were "restricted securities" as that term is defined
under Rule 144 promulgated under the Securities Act of 1933. In general, under
Rule 144, a person (or persons whose shares are aggregated) who holds securities
which have been outstanding and not owned beneficially by any affiliate of the
Company for at least two years may sell within any three month period a number
of shares which does not exceed the greater of one percent of the then
outstanding shares of Common Stock or the average weekly trading volume during
the four calendar weeks prior to such sale. Rule 144 also permits the sale of
shares by a person who is not an affiliate of the Company and who has satisfied
a three-year holding period without any quantity limitation. The Company is
unable to predict the effect that sale made under Rule 144 or pursuant to other
exemptions under the Securities Act of 1933 may have on the then prevailing
market price of the Common Stock. Nonetheless, the possibility exists that the
sale of these shares may have a negative effect on the price of the Company's
Common Stock in any such market.
14. Default in Payment of Series B Preferred Stock Dividend. In January of
1996 the Company defaulted in the payment of its quarterly dividend payment on
its 10.5% Series B Preferred Stock. Each holder is entitled to a dividend of
$.42 per year. The aggregate deficiency in dividend payment is cumulative and
must be fully paid or set apart for payment before any dividend can be paid or
set apart for payment of any class of common stock of the Company. This default
and corresponding cumulation makes it more unlikely that any dividend will be
paid on the Company's common stock in the foreseeable future. As of the date of
this Prospectus, the total arrearage is three quarterly payments totaling
$117,180.
CAPITALIZATION
The following table sets forth capitalization of the Company as of June 30,
1996. This table should be read in conjunction with the Financial Statements and
related notes thereto included elsewhere in this Prospectus.
June 30, 1996
Long Term Debt $1,465,511
Stockholders' Equity:
Preferred Stock, Series B $.005
par value, 10,000,000 shares authorized;
372,000 shares issued
and outstanding 1,860
Common Stock $.001 par value -
25,000,000 shares authorized,
3,875,476 shares issued and
outstanding 4,256
9
<PAGE>
Additional Paid-In Capital 8,877,493
Deficit (8,026,065)
Treasury Stock ( 441,345)
Total Shareholders' Equity 416,199
---------
Total Capitalization $2,297,909
==========
SELECTED FINANCIAL DATA
The selected financial data set forth below, with respect to the Company's
statements of operations for the years ended March 31, 1996 and 1995 is derived
from financial statements of the Company. The selected financial data, with
respect to the Company's statements of operations for the three months ended
June 30, 1996 and 1995, and with respect to the Company's balance sheet as of
June 30, 1996, is derived from unaudited financial statements of the Company.
The unaudited financial statements include all adjustments, consisting only of
normal accruals, that the Company considers necessary for a fair representation
of the financial position and results of operations for these periods. Operating
results for the three months ended June 30, 1996 are not necessarily indicative
of the results that may be expected for the entire year ending March 31, 1997.
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's financial statements and notes thereto included.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Three Months Ended Years Ended
June 30 March 31
Revenues: 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Servicing fee income $ 528,960 $ 635,451 $ 2,466,646 $3,293,878
Other fee income 183,690 236,021 1,009,685 985,759
Gain on sale of mortgage loans 694,112 513,968 2,531,580 515,478
Gain on sale of servicing rights -0- 99,759 99,759 383,443
Interest income 240,280 100,953 639,458 204,735
Other income 15,443 14,043 144,200 97,906
--------- --------- ---------- ---------
Total operating revenues 1,662,485 1,600,195 6,891,328 5,481,199
--------- --------- ---------- ---------
Expenses:
Servicing expense 139,581 313,830 1,420,763 1,285,843
Personnel 1,019,983 867,581 3,789,712 3,576,031
General and administrative 398,791 457,558 2,239,103 2,298,834
Interest expense 222,189 153,301 721,281 485,338
Depreciation and amortization 373,548 450,427 1,485,192 1,860,926
Loss on sale of servicing rights 13,482 -0- -0- -0-
Other 57,041 44,852 370,504 788,492
--------- --------- ---------- ----------
Total operating expenses 2,224,615 2,287,549 10,026,555 10,295,464
--------- --------- ---------- ----------
Loss before income taxes ( 562,130) (687,354) (3,135,227) (4,814,265)
Income tax expense (benefit) -0- -0- 49,350 ( 850,768)
--------- --------- ---------- ---------
Net loss $(562,130) $(687,354) $(3,184,577) ( 3,963,497)
--------- --------- --------- ----------
Weighted average shares outstanding 3,819,000 3,775,000 3,776,000 3,726,000
========= ========= ========== ==========
Loss per common share $( 0.15) $( 0.19) $( 0.88) $( 1.11)
======== ======== ========= =========
10
</TABLE>
<PAGE>
Balance Sheet Data
Assets JUNE 30, 1996
------ -------------
Cash and Investments -0-
Mortgage servicing advances
and accounts receivable 530,826
Property and equipment, net 1,645,012
Mortgage loans held for sale 13,708,717
Mortgage loans held for investment 87,324
Purchased mortgage servicing rights, net 2,022,119
Other 1,686,904
----------
Total Assets $19,680,902
==========
Liabilities and Stockholders' Equity
------------------------------------
Accounts payable and accrued expenses $ 2,373,071
Checks outstanding in excess of bank balance 194,537
Notes payable 16,338,905
Capitalized lease obligations 358,190
Total liabilities $19,264,703
Total stockholders' equity 416,199
Total liability and stockholders' equity $19,680,902
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Advanced Financial, Inc. (the "Company") is a publicly traded Delaware
Corporation formed in June 1988. In July 1990 the principals of the Company
recognized an opportunity existed in the mortgage servicing industry due to the
collapse of the savings and loan industry. On March 29, 1991, the Company was
successful in acquiring Creative Financing, Inc. as a wholly owned subsidiary.
In 1992, this subsidiary changed its name to Continental Mortgage, Inc. The name
was again changed due to expansion into additional states, to AFI Mortgage,
Corp. ("AFIM") in November 1994.
AFIM is a mortgage banking company servicing a principal balance of
approximately $439,000,000 mortgages as of June 30, 1996 and originating
approximately $44.4 million in single family housing mortgages for the quarter
ended June 30, 1996. AFIM is a full service residential mortgage company and has
all approvals needed to service mortgages for the Federal National Mortgage
Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and
Government National Mortgage Association (GNMA). Due to the current size of the
servicing portfolio, the Company does not believe it is taking advantage of the
economies of scale for cost of servicing to maximize the return on its
investment in mortgage servicing rights. Also, the current price the Company is
receiving from investors for the servicing rights on originated loan production
is strong and beneficial to fund the operations of the Company. As a result, the
Company has sold approximately $240,000,000 of its current servicing portfolio
to be recorded in the second quarter of fiscal 1997, as well as future servicing
rights generated from its own originations, to reduce its outstanding debt and
related interest expense and to use any additional capital for expansion of its
origination operations.
11
<PAGE>
The Company intends to continue its expansion through the implementation of
a convenient, low cost and rate competitive national network known as the
Desktop Mortgage Loan Origination System (Desktop). The Company's Desktop
installations are primarily targeted at respected residential real estate
brokerage offices. This market is targeted due to the fact that current mortgage
loan production volume is driven by real estate transactions versus refinancing
transactions. However, if the market provides for a decrease in interest rates,
an active refinancing market will be established through not only such real
estate brokers but the placement of terminals with respected mortgage brokers.
RESULTS OF OPERATIONS
- ---------------------
Quarter Ended June 30, 1996 Compared To The Quarter Ended June 30, 1995
- -----------------------------------------------------------------------
The Company had net operating revenues of $1,662,485 for the quarter ended
June 30, 1996 compared to $1,600,195 for the quarter ended June 30, 1995. Net
loss for the quarter ended June 30, 1996 was $562,130 or .15 cents per share
primary and fully diluted compared to net loss of $687,354 or .19 cents per
share primary and fully diluted for the quarter ended June 30, 1995. Primary
earnings per share for the quarter ended June 30, 1995 are calculated after
deducting, from net loss, $39,060 paid in preferred stock dividends. No
preferred stock dividends were paid in the quarter ended June 30, 1996 but were
reflected in the earnings per share calculation.
The decrease in service fee income to $528,960 for the quarter ended June
30, 1996 from $635,451 for the quarter ended June 30, 1995 reflected the
decrease in the servicing portfolio to $439,000,000 at June 30, 1996 from
$512,000,000 at June 30, 1995. Also, in the first quarter of fiscal 1996, the
Company completed the sale and transfer of approximately $4.6 million in second
mortgages. A gain of $99,759 was recognized on the sale in fiscal 1996. In the
first quarter of fiscal 1997, the Company completed the sale and transfer of
approximately $20 million of loan servicing for a slight loss of $13,482.
At June 30, 1996, the Company entered into a purchase and sale agreement to
sell approximately $240,000,000 of the Company's outstanding servicing
portfolio. The related after tax gain of approximately $290,000 will be
recognized in the second quarter of fiscal 1997. The actual transfer is also
expected to take place during the second quarter of fiscal 1997. The proceeds
from the sale are to be used to pay off related indebtedness. The Company
continues to evaluate the need to sell its remaining servicing portfolio.
12
<PAGE>
The decrease in other fee income to $183,690 for the quarter ended June 30,
1996 from $236,021 is also the result of the decrease in the servicing portfolio
to $439,000,000 at June 30, 1996 from $512,000,000 at June 30, 1995.
Gain on sale of mortgage loans for the quarter ended June 30, 1996 was
$694,112 compared to a gain on sale of mortgage loans of $513,968 for the
quarter ended June 30, 1995. The gain on sale of mortgages is derived through
the sale of loans originated and sold to investors, such as FNMA, FHLMC or GNMA
as well as private investors. This gain also includes all servicing released
premiums, origination fee income and is net of all direct origination expenses.
The increase is due to the 35 (average over last 18 months) Desktop terminals
that are seasoned with time. For the quarter ended June 30, 1996, the Company
closed and funded approximately $44 million of retail loan production compared
to $21 million for the quarter ended June 30, 1995. As a result of the capital
needed to expand the Desktop product as well as other avenues for originations,
substantially all loans are being sold servicing released resulting in a premium
paid by the purchaser for these loans of approximately 1.25 percent of unpaid
principal balance. The Company expects to see continued increased gains on sale
of mortgage loans for fiscal 1997 due to the factors described above. The
Company currently has a $17 million credit facility with BankOne, Texas. The
Company also has an uncommitted credit facility with Merrill Lynch on a loan by
loan basis. These credit facilities allow the Company to fund originations of
mortgage loans as well as fund servicing advances.
The increase in interest income to $240,280 for the quarter ended June 30,
1996 from $100,953 for the quarter ended June 30, 1995 is due to increased loan
production to $44 million from $21 million respectively. The Company also earned
interest on its excess compensating balances for the quarter ended June 30, 1996
which were previously used as an earnings credit against the bank analysis fee.
The Company's total operating expenses for the quarter ended June 30, 1996
were $2,224,615 compared to $2,287,549 for the quarter ended June 30, 1995.
Included in the operating expenses for the quarter ended June 30, 1995 was
expense relating to the State of Washington operations of $274,000. Effective
October 1995, the Company sold its two Washington operations to two independent
companies.
The decrease in servicing expense to $139,581 for the quarter ended June
30, 1996 compared to $313,830 for the quarter ended June 30, 1995 is due to
reimbursement of approximately $70,000 from claims filed against errors and
omissions insurance for penalties paid by AFIM for delinquent taxes on servicing
portfolios transferred to the Company through purchases.
13
<PAGE>
The increase in personnel to $1,019,983 for quarter ended June 30, 1996
compared to $867,581 for quarter ended June 30, 1995 is due primarily to the
personnel costs related to increased production. With increased production and
the growth of the Desktop installations anticipated by management during fiscal
1997, a decrease in personnel costs is not anticipated.
The increase in interest expense to $222,189 for quarter ended June 30,
1996 from $153,301 for quarter ended June 30, 1995 is the result of increased
loan production to $44 million from $21 million, respectively. The Company has a
banking relationship that provides more favorable warehouse interest rates
because of compensating escrow balances from the servicing portfolio. With the
sale of a portion of the servicing portfolio, the Company will want to make sure
the mortgage loans held for sale are shipped to investors timely for funding to
ensure the benefit of the positive spread due to the remaining compensating
balances.
In connection with the acquisition of mortgage servicing rights, the
Company capitalizes the price paid for the mortgage servicing rights acquired.
The resulting asset is amortized on an accelerated basis and evaluated for
impairment on a quarterly basis. Amortization for the quarter ended June 30,
1996 was $202,112 compared to $269,341.
The Company's servicing portfolio is subject to reduction by normal
amortization, by sales of servicing rights, by prepayment or by foreclosure of
outstanding loans. The value of the Company's loan servicing portfolio may be
adversely affected if mortgage interest rates decline and loan prepayments
increase. The value is also adversely affected by unanticipated rates of
default. Conversely, as mortgage interest rates increase or as rates of default
decrease, the value of the Company's loan servicing portfolio may be positively
affected. The weighted average interest rate on the underlying mortgage loans
being serviced by the Company at June 30, 1996 was 9.03%. The Company's PMSR's
are subject to a great degree of volatility in the event of unanticipated
prepayments or defaults. Prepayments or defaults in excess of those anticipated
at the time PMSR's are recorded result in decreased future net servicing income.
Such decreases in future net servicing income would result in accelerated
amortization and/or impairment of PMSRs. The Company's net earnings, future net
earnings and liquidity are adversely affected by unanticipated prepayments of
the mortgage loans underlying the PMSRs.
The Company has a net operating loss carryforward for tax purposes of
approximately $6.2 million at June 30, 1996. No income tax benefits are
recognized for the quarter ended June 30, 1996 or 1995 since a valuation
allowance for the same amount would be required under FASB 109. In determining
the amount of the valuation allowances, management has relied on a potential
tax- planning strategy whereby an unrealized taxable gain in the Company's
purchased mortgage servicing rights portfolio could be recognized through the
sale of such servicing rights.
14
<PAGE>
Year Ended March 31, 1996 Compared To The Year Ended March 31, 1995
- -------------------------------------------------------------------
The Company had operating revenues of $6,891,328 for the year ended March
31, 1996 compared to $5,481,199 for the year ended March 31, 1995. Loss before
income taxes was $3,135,227 for the year ended March 31, 1996 compared to a loss
of $4,814,265 for the year ended March 31, 1995. Net loss for the year ended
March 31, 1996 was $3,184,577 or ($.88) per share compared to net loss of
$3,963,497 or ($1.11) per share for the year ended March 31, 1995.
The decrease in the service fee income to $2,466,646 for year ended March
31, 1996 compared to $3,293,878 for the year ended March 31, 1995, reflected the
decrease in the servicing portfolio to $481,000,000 at March 31, 1996 from
$527,000,000 at March 31, 1995. Also, in the first quarter of fiscal 1996, the
Company completed the sale and transfer of approximately $4.6 million in second
mortgages. A gain of $99,759 was recognized on the sale in fiscal 1996.
Gains on sales of mortgage loans for the year ended March 31, 1996
increased significantly to $2,531,580 compared to $515,478 for the year ended
March 31, 1995. The gain on sale of mortgages was derived through the sale of
loans originated and sold to investors, such as FNMA, FHLMC or GNMA as well as
private investors. This gain also include all servicing released premiums,
origination fee income and is net of all direct origination expenses. The
increase was due to the originations from the 35 (average for the year) Desktop
terminals that were in place for the whole year as well as originations from the
Washington operation (for the first seven months of fiscal 1996). The Company
originated $111 million loans for the year ended March 31, 1996 compared to $36
million for the year ended March 31, 1995. As a result of the capital needed to
expand this Desktop product, substantially all loans are being sold servicing
released resulting in a premium paid by the purchaser for these loans of
approximately 1.25 percent of unpaid principal balance. The Company expected to
see continued increased gains on sale of mortgage loans for fiscal 1997 due to
the factors described above. The Company currently has a $17 million credit
facility with BankOne, Texas. The Company also has an uncommitted credit
facility with Merrill Lynch on a loan by loan basis. These credit facilities
allow the Company to fund servicing advances and origination of mortgage loans.
During 1995, certain of the sales of servicing rights represented the
remaining servicing rights underlying the participation agreements outstanding
of approximately $68,000,000 in unpaid principal balances resulting in a
reduction of interest expense of $59,000 as a result of the participation
liability being satisfied. In addition, the Company bought back the 75% cash
flow participation on $11.6 million of underlying servicing for $79,000. This
resulted in a reduction of interest expense for the fiscal year ended 1995 of
approximately $41,000.
15
<PAGE>
The increase in interest income to $639,458 for year ended March 31, 1996
from $204,735 for the year ended March 31, 1995 was due to increased loan
production to $111 million in fiscal 1996 from $36 million in fiscal 1995. The
Company also earned interest on excess compensating balances in fiscal 1996
which were previously used as an earnings credit against the bank analysis fees.
The Company's total operating expenses for the year ended March 31, 1996
were $10,026,555 compared to $10,295,464 for the year ended March 31, 1995. The
Company had slightly higher operating expenses during the year ended March 31,
1995 than would normally be experienced due to several factors. Effective July
1, 1994, the Company opened mortgage loan production branches with three
locations in the State of Washington. The amounts included in operating expenses
relating to these operations are approximately $1,093,000 for fiscal 1995. Due
to continued losses, the Company ceased its Washington operation in October 1995
resulting in approximately $576,000 in expenses for fiscal year ended 1996. The
Company also experienced one time write offs and reserve establishments in the
amount of $700,000 for the 1995 fiscal year compared to $193,000 for fiscal 1996
discussed below.
The increase in servicing expenses to $1,420,763 for year ended March 31,
1996, from $1,285,843 for year ended March 31, 1995, is due to an increase in
the foreclosure reserve of approximately $140,000 to adequately reserve for
possible losses on loans serviced with recourse.
Due to increased production of $111 million during fiscal 1996 compared to
$36 million in fiscal 1995, interest expense increased to $721,281 for year
ended March 31, 1996 compared to $485,338 for year ended March 31, 1995. The
Company has a banking relationship that provides more favorable warehouse
interest rates because of compensating escrow balances. During the first seven
months of fiscal 1996, the average warehouse balance exceeded the compensating
balances and therefore, there was a higher interest rate used against loan
fundings. To help maintain the interest margin going forward, the Company
transferred some additional escrow balances to the lending facility.
The slight increase in personnel expenses to $3,789,712 for the year ended
March 31, 1996, from $3,576,031 is due primarily to the personnel costs related
to increased production. With the growth of the Desktop installations
anticipated by management during fiscal 1997, a decrease in Desktop personnel
costs is not expected. However, due to the sale of the Washington operations, in
the third quarter of fiscal 1996, the Company experienced a decrease related to
those salaries of approximately $125,000.
16
<PAGE>
The Company had a loss carry-forward for tax purposes of approximately $5.6
million at March 31, 1996. No income tax benefits are recognized for the year
ended March 31, 1996 since a valuation allowance for the same amount would be
required under FASB 109. In determining the amount of the valuation allowance,
management has relied on a potential tax-planning strategy whereby an unrealized
taxable gain in the Company's purchased mortgage servicing rights portfolio
could be recognized through the sale of such servicing rights. During the fiscal
1996, the Company wrote the asset down to $440,000 from $490,000 for which
management believes that it is more likely than not that this deferred tax asset
will be realized. When the servicing sale of approximately $260,000,000 of
AFIM's current servicing portfolio is completed, during first quarter of fiscal
1997, this tax asset will be written off the balance sheet.
The price paid for the mortgage servicing rights acquired is amortized on
an accelerated basis and evaluated for impairment on a quarterly basis.
Amortization, including impairment charges, for 1996 was $1,105,342 versus
$1,442,874 in 1995. The Company reviews its servicing portfolio to determine if
adjustments should be made to its amortization schedules or carrying values of
its PMSR's due to changes in interest rates, historic prepayment rates, expected
prepayment rate and other economic factors. As a result of significant
prepayment activity combined with projections of future prepayment activity, the
Company recorded additional amortization in 1996 charges of approximately
$95,000 related to an adjustment to the carrying value of purchased mortgage
servicing rights (PMSRs). As a percentage of PMSRs at the beginning of the year,
amortization, including impairment charges, was approximately 31% and 25% for
1996 and 1995, respectively. If the Company was to experience high levels of
prepayments, acceleration of amortization, impairment charges or both may be
required in the future.
The Company's servicing portfolio is subject to reduction by normal
amortization, by sales of servicing rights, by prepayment or by foreclosure of
outstanding loans. The value of the Company's loan servicing portfolio many be
adversely affected if mortgage interest rates decline and loan prepayments
increase. The value is also adversely affected by unanticipated rates of
default. Conversely, as mortgage interest rates increase or as rates of default
decrease, the value of the Company's loan servicing portfolio may be positively
affected. The weighted average interest rate on the underlying mortgage loans
being serviced by the Company as of March 31, 1996, was 9.0%. The Company's
PMSRs are subject to a great degree of volatility in the event of unanticipated
prepayments or defaults. Prepayments or defaults in excess of those anticipated
at the time PMSRs are recorded result in decreased future net servicine income.
17
<PAGE>
Such decreases in future net servicing income would result in accelerated
amortization and/or impairment of PMSRs. The Company's net earnings, future net
earnings and liquidity are adversely affected by unanticipated prepayments of
the mortgage loans underlying its PMSRs.
The decrease in other expense to $370,504 for year ended March 31, 1996,
from $788,492 for year ended March 31, 1995, is due to establishing reserves for
REO's and loans held for investment in the amount of $58,000 and for receivables
in the amount of $105,000 during fiscal 1995. The Company also had some expenses
related to the Washington operations, in fiscal 1995 in addition to those noted
above, in the amount of $131,000. As a result of settling a lawsuit with a
Phoenix corporation, a receivable in the amount of $62,000 was written off
during the fourth quarter of fiscal 1995. The Company also wrote off a $100,000
receivable relating to the second mortgage loans sold during fiscal 1995.
Financial Position
- ------------------
The Company has seen an increase in its total assets and a decrease in
stockholders' equity. The Company's total assets were $19,680,902 at June 30,
1996 compared to $17,313,516 at March 31, 1996. The increase is due primarily to
the increase in mortgage loans held for sale at June 30, 1996. Stockholders'
equity has decreased to $416,199 at June 30, 1996, from $978,329 at March 31,
1996. The decrease is due to the net loss for the quarter ended June 30, 1996.
AFIM's net worth is currently satisfactory for those financial institutions
purchasing loans from the Company on a servicing release basis. However, AFIM is
not currently in compliance with minimum net worth requirements for GNMA or FHA.
AFIM plans to increase the net worth to meet both agency requirements through
the sale of a portion of the servicing portfolio as well as through additional
stock options issued in accordance with a consulting agreement entered into in
February 1996, discussed below. To help preserve the net worth, preferred stock
dividends have been suspended until the cash flow of the Company permits
payment. The preferred stock carries a $.42 per share annual cumulative
dividend. Recently it was ascertained that the Company's FHLMC principal and
interest custodial account was short approximately $680,000. The account is to
be funded with proceeds from the sale of the related servicing. The Company has
identified approximately $255,000 of such shortage which has been reflected in
accounts payable and accrued expenses in the Company's consolidated balance
sheet at June 30, 1996. The remaining shortage arose from shortages in the
previous servicers' custodial accounts that transferred to the Company when the
servicing rights were purchased from such servicers. The Company has made a
claim for approximately $75,000 to FHLMC for penalties and interest and plans to
file claims against the previous servicers for the remaining shortage.
18
<PAGE>
Management believes that the items noted above will enable the Company to
meet its obligations and maintain its financial ratios and balances required by
its lenders and investors; however, there are no assurances that the Company
will ultimately be able to realize its assets and discharge its liabilities in
the normal course of business.
The mortgage servicing advances and accounts receivable were $530,826 at
June 30, 1996, compared to $520,620 at March 31, 1996. The balance is primarily
comprised of advances made related to servicing functions. There are some pools
in the servicing portfolio that require the servicer to pass on to the investor
all principal and interest payments regardless of whether the payment has been
collected. If customers are delinquent, an advance is required by the Company.
As payments are made by borrowers during the month, the advance is repaid to the
Company.
At June 30, 1996, the Company had a $65,000 outstanding receivable from a
related party compared to $190,000 at March 31, 1996. The receivable, which was
subsequently collected, resulted from a consulting agreement entered into in
February 1996 with four companies. Under the terms of each agreement, the
Company is provided with financial and public relations services, including
advice concerning marketing surveys, investor profiles and increasing investor
awareness of the Company and its products and services. The term of the
agreement is six months. As compensation for this service, the Company has
granted options to purchase 1,000,000 shares of common stock at $.50 per share.
Such options expire in fiscal 1997. The $190,000 is the exercise of the first
380,000 shares.
The Company had $13,708,717 in mortgage loans held for sale at June 30,
1996 (which were pledged to collateralize the Company's warehouse lines)
compared to $10,110,747 at March 31, 1996, which reflects the timing of the sale
of the mortgage loans in the secondary market.
The Company expects its assets to continue to grow as the Company expands
its origination business. The Company currently has a $17 million credit
facility with BankOne, Texas, and an uncommitted credit facility with Merrill
Lynch. As a result, the warehouse lines are in place to accommodate increased
loan originations. The BankOne, Texas agreement is up for renewal at August 1996
which time the Company anticipates a review and adjustment of covenants. The
Merrill Lynch agreement is an uncommitted line with approval on a loan by loan
basis. In fiscal 1996, the Company had a note payable come due of approximately
$550,000 secured by a portion of the servicing portfolio currently being sold.
Management will repay the note with the proceeds from the sale proceeds. The
Company's building note is also up for renewal in fiscal 1997 which Management
plans to refinance.
19
<PAGE>
The net decrease in cash of the Company was $585,643 for the quarter ended
June 30, 1996. As the end of fiscal 1996, the Company received proceeds from a
loan financing of $750,000. The proceeds were used to pay down a taxes and
insurance advance line and pay $50,000 down on a working capital line with
BankOne. The Company paid an additional $25,000 down on the working capital line
during the quarter ended June 30, 1996. With the increase in originated mortgage
loans, the related warehouse line was also increased during the quarter ended
June 30, 1996. BankOne will not lend 100% of the outstanding loan balance;
therefore, the Company must fund the difference. The Company also paid $93,118
in capital lease payments for the purchase of the IBM AS/400, office furniture
and Desktop computers and equipment. During fiscal 1997, the Company expects to
generate cash through the additional loan originations, the sale of the
servicing portfolio and the raising of capital.
PROSPECTIVE TRENDS
- ------------------
The Company will continue to develop and implement the latest
state-of-the-art technologies that will enhance the Company's operations as well
as increase productivity. The Company's Management believes that new
technologies will be one of the most significant factors in increasing
production volume and reducing costs of originating and servicing mortgage
loans. Another important factor will be the strategies used to implement these
new technologies. The Company believes its strategy of implementing a
convenient, low cost national network of Desktop Mortgage Loan Origination
Systems will substantially increase the Company's loan originations and
ultimately its servicing portfolio.
A key technology that the Company implemented in the first quarter of
fiscal 1997, is the use of Automated Underwriting. Automated Underwriting is the
use of artificial intelligence through computer technology to make underwriting
and credit decision on residential mortgage loans. The use of automated
underwriting will reduce the time needed to process and underwrite a residential
mortgage loan from approximately 30 to 45 days to as few as 5 to 14 days. It
will also significantly lower the cost of processing and underwriting those
loans since the technology will increase the number of loans processed and
underwritten per employee.
To compliment the Desktop sites, the Company will be recruiting loan
originators to set up "net branches". The originator, who will be an employed by
AFIM, will be credited all revenues generated from the loan above the Company's
par price which will be netted against all the expenses related to the
origination site. The Company feels this is another cost efficient method of
originating loans in comparison to the traditional retail branch.
20
<PAGE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
- ----------------------------------------------
The Company adopted Statement of Financial Accounting Standards No. 114 and
118, "Accounting by Creditors for Impairment of Loan," during the first quarter
of fiscal 1996. This statement requires the accounting by creditors for
impairment of certain loans. The impact of adopting the statement on the
Company's consolidated financial statements was not material.
The Company adopted Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights, an amendment to FASB Statement No.
65", during the first quarter of fiscal 1997. The statement generally requires
entities that sell or securitize loans to retain the mortgage servicing rights
to allocate the total cost of mortgage servicing rights to the loan and the
related servicing right based on their relative fair values. Costs allocated to
mortgage servicing rights should be recognized as a separate asset and amortized
over the period of estimated net servicing income and periodically evaluated for
impairment based on fair value. The impact of adopting this statement was not
material on the Company's 1997 consolidated financial statements since the
Company intends on selling primarily all originated loans servicing released
during fiscal 1997.
SFAS No. 125, "Accounting for Transfers and Servicing of financial Assets
and Extinguishments of Liabilities" supersedes SFAS No. 122 and will be
effective for all transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. This statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. It
distinguished transfers of financial assets that are sales from transfers that
are secured borrowings.
Under the financial-components approach, after a transfer of financial
assets, an entity recognizes all financial assets. It no longer controls any
liabilities that have been extinguished. The financial-components approach
focuses on the assets and liabilities that exist after the transfer. Many of
these assets and liabilities are components of financial assets that existed
prior to the transfer. If a transfer does not meet the criteria for a sale, the
transfer is accounted for as a secured borrowing with a pledge of collateral.
The adoption of this statement is not expected to have a material effect on the
consolidated financial statements.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of" is
required for fiscal year beginning April 1, 1996. The Statement requires that
certain long- lived assets be reviewed for impairment when events or
21
<PAGE>
circumstances indicates that the carrying amounts of the assets may not be
recoverable. If such review indicates that the carrying amount of the assets may
not be recoverable. If such review indicates that the carrying amount of an
asset exceeds the sum of its expected future cash flows, the asset's carrying
value is written down to fair value. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less cost to sell. The
impact of adopting this Statement on the Company's consolidated financial
statements has not been determined by Management.
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation," will be adopted by the Company during fiscal year
ending March 31, 1997. This statement establishes financial accounting and
reporting standards for stock- based employee compensation plans. These plans
include all arrangements by which employees receive shares of stock or other
equity investments of the employer or where an employer issues its equity
instruments to acquire goods and services from nonemployees. This statement will
require pro forma disclosures of net income and earnings per share as if a new
accounting method based on the estimated fair value of employee stock options
had been adopted. The Company has not decided if the optional accounting
treatment proposed by SFAS No. 123 will be adopted.
PRICE RANGE OF COMMON STOCK
The Company's common stock has been traded on the American Stock
Exchange since March 29, 1993 under the symbol AVF. Prior to that time, the
Company's common stock was traded in the over the counter market on NASDAQ under
the symbol AVFI. The following table sets forth the 1995 period and the 1996
period closing prices for common stock as reported on the American Stock
Exchange. The prices were obtained from the American Stock Exchange and do not
include retail mark-ups, mark-downs, or other fees or commissions, and may not
represent actual transactions.
1995
- ----
High Low
---- ---
Quarter Ended June 30, 1994 $3.31 $2.38
Quarter Ended September 30, 1994 2.50 1.75
Quarter Ended December 31, 1994 1.68 1.06
Quarter Ended March 31, 1995 1.50 1.00
1996
- ----
Quarter Ended June 10, 1995 1.75 .88
Quarter Ended September 30, 1995 1.56 1.00
Quarter Ended December 31, 1995 1.38 .56
Quarter Ended March 31, 1996 1.38 .69
Quarter Ended June 30, 1996 1.62 1.00
22
<PAGE>
At August 7, 1996, the market price of the Company's common stock was $1.25
per share. On such date the Company had 178 holders of record of the Company's
common stock and the Company estimates that it has approximately 1,200
beneficial shareholders.
The Company has not yet paid any cash dividends on its Common Stock to date
and, except for the dividend requirements under the Company's issued and
outstanding 10.5% Series B Preferred Stock, the Company does not anticipate
paying dividends in the foreseeable future. The Company is not subject to any
restrictive covenants or agreements which limits its ability to pay dividends.
Ultimately, funds for the payment of dividends will be provided by the Company's
subsidiaries. While AFI Mortgage Corp. is subject to restrictive covenants in
connection with certain of its borrowing arrangements, it is not presently
anticipated that such covenants will preclude the Company from paying dividends
on the currently issued and outstanding preferred stock. The Company did not pay
the 10.5% Series B Stock dividends for the last two quarters of fiscal 1996 due
to the cash flow needs for the operation of the Company. The Company will
continue to accumulate the preferred dividend until such time as the Company's
cash flow improves sufficiently to pay such dividend.
BUSINESS
Advanced Financial, Inc. (the "Company") is a publicly traded Delaware
company formed in June 1988. In July 1990 the principals of the Company
recognized an opportunity existed in the mortgage servicing industry due to the
collapse of the savings and loan industry. On March 29, 1991 the Company was
successful in acquiring Creative Financing, Inc. as a wholly owned subsidiary.
In 1992, this subsidiary changed its name to Continental Mortgage, Inc. The name
was again changed, due to expansion into additional states, to AFI Mortgage,
Corp ("AFIM") in November 1994. AFIM is a mortgage banking company servicing
approximately $439,000,000 in mortgages as of June 30, 1996.
In 1992 the Company completed a 400,000 Unit public offering of its
securities and received net proceeds therefrom of $1,265,418. Each Unit
consisted of one share of 10.5% Series B Preferred Stock, one Class A Warrant to
purchase one share of Common Stock at $3.50 per share and one Class B Warrant to
purchase one share of Common Stock at $10.00 per share. This Prospectus covers
the shares underlying such Class B Warrants. On October 19, 1993 the Company
called for redemption all Class A Warrants resulting in the exercise of 395,990
warrants at $3.50 each (total proceeds of 1,263,732, net of costs). The Company
also completed, on March 29, 1993, a public offering of its common stock and
raised net proceeds therefrom of $3,510,138. The net proceeds were used
primarily to purchase mortgage loan servicing rights.
23
<PAGE>
AFIM'S History
- --------------
AFIM was founded in February of 1982. Since inception, AFIM has focused on
the origination, refinancing and servicing of 1-4 family residential home
mortgages. The Company's physical facilities and computer system allows the
Company to handle that volume of loans which the Company anticipates it will
service and originate in the foreseeable future.
The Company intends to build on its implementation of a convenient, low
cost and rate competitive national network known as the Desktop Mortgage Loan
Origination System (Desktop). The Company's Desktop installations are primarily
targeted at respected residential real estate brokerage offices. This market is
targeted due to the fact that current mortgage loan production volume is driven
by real estate transactions versus refinancing transactions. However, if the
market provides for a decrease in interest rates an active refinancing market
will be established through not only such real estate brokers and the Company's
own servicing portfolio but the placement of terminals with respected mortgage
brokers, small savings and loan institutions and branch bank locations without a
competitive mortgage product.
As of June 30, 1996, the Company had 35 installations in place for at least
30 days. The Company's philosophy is to manage the loan representatives versus a
more common occurrence of control by the real estate broker. The typical
lead-time required to interview and hire a loan officer, install the Desktop
system and train the respective staff averages 90 days. The Company works with a
marketing firm to help target potential real estate offices for application and
possible installations. When an application is received, it is reviewed for
number of buyer side transactions as well as location to determine those real
estate brokers whose business has growth potential. The Company has increased
its desktop locations from 12 at March 31, 1995 to 35 at June 30, 1996.
Accordingly, the Company anticipates significant growth of mortgage loan
origination production during the fiscal 1997 year from the Desktop terminals.
Investment Policies
- -------------------
Investments in Real Estate Mortgages
- ------------------------------------
The Company invests in real estate mortgages by acting as a loan originator
as part of its core business. Primarily all mortgage originations are first
mortgages on single family dwellings. For a general description of each type of
mortgage activity in which the Company engages, such as origination, servicing
and warehousing, and the portfolio turnover rate, see below.
24
<PAGE>
The Company does not generally invest in securities of or interests in
persons primarily engaged in real estate activities. The only real estate owned
by or in which the Company has an investment interest is the Company's
headquarters building which was developed for the Company and which the Company
occupied in June of 1993. The building houses all executive, administrative and
servicing functions of the Company.
Properties Owned by the Company
- -------------------------------
The Company owns the building and land upon which the building sits in fee
simple subject to a mortgage in favor of Citizens Bank of Shawnee, Shawnee,
Kansas. As of June 30, 1996, the mortgage has a principal balance of $583,745,
with a fixed rate of eight percent and is payable monthly with the entire
balance due and payable in 1996. The balance may be prepaid at any time without
penalty. In March of 1996, the Company borrowed $750,000 and secured the
repayment of $350,000 of such borrowings by granting a second mortgage to the
lender. In the opinion of management, the property is adequately covered by
insurance. The building is utilized entirely by the Company. The federal tax
basis of the property is $1,100,000; the property is depreciable for tax
purposes at the rate of 3.179% per year; the method of depreciation is straight
line; the life of the property for purposes of depreciation is 31.5 years; the
real estate tax rate is approximately 13% and the annual real property taxes are
approximately $24,000.
Loan Servicing
- --------------
In the past, the Company serviced substantially all the mortgage loans that
it originated or purchased from failed institutions. Currently, substantially
all originated mortgage loans are sold servicing released. As a result purchased
contracts to service single-family residential mortgage loans originated by
other lenders comprise the majority of the Company's mortgage servicing
portfolio at June 30, 1996. Servicing includes collecting and remitting loan
payments, making advances when required, accounting for principal and interest,
holding escrow (impound) funds for payment of taxes and insurance, making
inspections of the mortgage premises, contacting delinquent mortgagors,
supervising foreclosures and property dispositions in the event of unremedied
defaults and generally administering the loans. The Company receives fees for
servicing mortgage loans, owned by investors. The fees on the Company's
portfolio are calculated on the outstanding principal balances of the loans
serviced and are recorded as income when earned. Other fee income consists of
ancillary income (late charges, fax fees, insurance commissions, etc.)
associated with loan servicing and is recorded as income when collected.
The Company's servicing portfolio is subject to reduction by normal
amortization and by prepayment or foreclosure of loans. In addition, the Company
25
<PAGE>
has in the past and will in the future sell a portion of its portfolio of loan
servicing rights. For example, the Company sold servicing rights on
approximately $93,000,000 and $75,000,000 of mortgage loans from its loan
servicing portfolio during fiscal 1995 and 1994, respectively. In general, the
decision to buy or sell servicing rights is based upon management's assessment
of the Company's cash requirements, the Company's debt to equity ratio and other
significant financial ratios, the market value of servicing rights, and the
Company's current and future earnings objectives. Currently, the prices the
Company is receiving from investors for the servicing rights on originated loan
production is strong and beneficial to fund the operations of the Company. As a
result, the Company has entered into an agreement to sell approximately
$240,000,000 of its current servicing portfolio of $439,000,000. Such sale will
be completed in the second quarter of fiscal 1997. In addition, future servicing
rights generated from the Company's own loan originations are also being sold to
reduce its outstanding debt card related interest expenses and to use any
additional capital for expansion of its origination operations.
In the past, substantially all of the conforming loans (those loans that
are conventional loans originated by the Company) have been sold to Federal
National Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
("FHLMC") programs on a non-recourse basis, whereby foreclosure losses are
generally the responsibility of FNMA and FHLMC, and not the Company. However,
currently, all conforming conventional loans and non-conforming loans (loans
which do not meet FNMA, FHLMC and GNMA guidelines) originated by the Company are
being sold servicing released to private investors on a non-recourse basis.
Similarly, the government insured loans serviced by the Company are securitized
through the Government National Mortgage Association ("GNMA") , whereby the
Company is insured against loss by the Federal Housing Authority ("FHA") or
partially guaranteed against loss by the Veterans Administration ("VA").
Servicing Capability
- --------------------
A nonaffiliated third party provides electronic data processing through the
Company's IBM AS/400. Management believes this relationship increases the
Company's productivity and reduces its cost of servicing. However, due to the
current size of the Company's servicing portfolio, the Company does not believe
it is taking advantage of the economies of scale for costs of servicing to
maximize the return on its investment in mortgage servicing rights.
26
<PAGE>
Servicing Portfolio Characteristics
- -----------------------------------
The following table sets forth certain information regarding the Company's
servicing portfolio of mortgage loans, including loans held for sale, for the
periods indicated:
<TABLE>
<CAPTION>
June 30, 1996 March 31, 1996
------------- --------------
(000's Omitted) (000's Omitted)
<S> <C> <C>
Composition of Servicing Portfolio at Period End:
FHA Insured/VA Guaranteed Mortgage Loans...................... $208,979 $281,500
Conventional Mortgage Loans................................... 231,724 198,224
Second Mortgages............................................. 402 857
Delinquent Mortgage Loans and Pending Foreclosures
at Period End:
30 Days...................................................... 5.83% 4.47%
60 Days...................................................... 1.18% .92%
90 Days or more.............................................. .94% .79%
----- ----
Total Delinquencies 8.56% 6.18%
Foreclosure Pending............................................. .61% 0.59%
</TABLE>
At June 30, 1996, the delinquency rate had increased to 8.56% from 6.18% at
June 30, 1995.
Loan Originations
- -----------------
In January 1992 the Company expanded its mortgage banking operations to
include the ability to refinance mortgage loans. This enhances the Company's
servicing portfolio in several ways. It allows the Company to retain a portion
of its payoffs as new loans. Previously, the refinanced loans enhanced the value
of the Company's portfolio because the new loan had a lower note rate and a
longer servicing life. Currently, originated and refinanced mortgage loans are
sold servicing released which increases current cashflow and revenues. Also the
revenues and earnings provided by the refinancing business allow the Company to
diversify its potential revenue producing business away from loan servicing.
Between March 31, 1995 and March 31, 1996, the Company originated 1,284 loans
with a principal balance of approximately $111,500,000. In addition, in the
three month period ended June 30, 1996, the Company originated approximately
$44,000,000 in mortgage loans.
AFIM has developed an important expertise which allows the Company to close
new loans in several states through closing agents and title companies without
the necessity to invest in branch office overhead. This expertise is now
critical in the ability to place Desktop installations in real estate offices
nationwide. AFIM believes it is at the forefront of the industry to implement an
electronic national network of convenient origination locations with transaction
costs well below the traditional branch office approach. All processing and
underwriting are centralized at AFIM headquarters. The proprietary system
includes core software capabilities which run on a desktop or personal computer.
The Company has in-house computer oriented employees trained on the software to
perform necessary modifications to software as well as installation of the
software.
27
<PAGE>
The Company believes that in the future it will significantly build its
mortgage loan origination volume and ultimately the servicing portfolio
utilizing its proprietary Desktop terminals which it is placing in a network of
real estate brokerages nationwide. The Company believes it is at the forefront
of industry efforts to implement an electronic national network of convenient
origination locations with transaction costs well below the traditional branch
office approach. The Company believes the electronic origination network is
designed to increase convenience for the borrower while also lowering the
overall loan origination cost, thereby creating a cost advantage for the Company
versus industry peers. AFI also originates loans through retail originators
utilizing the Desktop terminals at minimal cost to the Company.
The system is initially being targeted for placement in real estate
brokerage companies with high residential growth, with follow-up strategies to
expand to small banks and small mortgage brokers. The system is designed to be
operated on-site by an AFIM loan representative with "expert systems" feedback
to the borrower, an evaluation of loan balance and repayment options. The loan
representative is managed by AFIM instead of the real estate broker which
management believes is rather unique to the industry philosophy. The information
is electronically transmitted by modem to AFIM where the actual processing and
underwriting is performed. The system offers the convenience of one stop
shopping for the home buyer in addition to productivity advantages for the
agents. The "Step Pre-Approval Process" provides the potential home buyer with a
formal written pre-approval for a monthly mortgage payment based on the
application in approximately 48 hours. This allows the home buyer and real
estate agent the advantage of knowing financing opportunities prior to the
negotiation of a potential contract.
In October 1994, the Company entered into a marketing agreement with
Advanced Realty Assistance Corporation, an unrelated Company located in
Clearwater Florida, to place the Desktop terminals in real estate brokerages
throughout the country.
As another method of increasing mortgage loan originations, in July 1994
the Company began mortgage production operations in the State of Washington. The
Company opened operations by hiring some of the staff of a Seattle area mortgage
broker. The Company's Desktop terminals have been installed in two offices as a
means of enhancing operating efficiencies. The predecessor organization
developed an active business in non-conforming loan originations which do not
meet industry standard credit, loan to value, or other criteria. Due to this
loan status, most yields are higher, making a strong market for purchase by
private investors. During the fifteen months of operation, the Washington
operation originated 474 loans with a principal balance of $42,221,000.
Effective October of 1995, the Company sold its two Washington operations to two
independent companies.
28
<PAGE>
Loan Processing
- ---------------
In connection with the origination of each loan, the Company processes the
loan application, prepares mortgage documentation, conducts credit checks, has
the property valued by appraisers and funds the loan. Loan applications must be
approved by the Company's underwriting department for compliance with
underwriting criteria, including the loan-to-value ratio, borrower's income
qualification and necessary insurance. After approval, the Company's current
policy is to obtain commitments from investors to purchase substantially every
loan to be originated by the Company. Most all of the Company's current
investors, including FNMA and FHLMC, do not review individual loan files prior
to issuance of commitments to purchase loans.
Once a commitment is in place and the Company has agreed to the terms of
the loan with the borrower, the loan is then closed by a third party. The loan
is then sold by the Company to the investor and the servicing is either kept or
released depending on the commitment agreed upon with the investor.
The Company's current 20,000 square foot facility will have sufficient
capacity for the employees needed for the anticipated near term production
increases with room to grow in to the fiscal year 1997.
Types of Loans
- --------------
Approximately half of the loans serviced by the Company are conventional
loans. The Company emphasizes the origination and purchase of "conforming"
loans, which are conventional loans having principal amounts within the maximum
amounts eligible for sale to FNMA and FHLMC (currently $203,150 for a one-family
property) and which otherwise comply with FNMA and FHLMC requirements. The
Company also originates and purchases "jumbo" loans (conventional loans that
exceed the maximum amounts qualifying for sale to FNMA or FHLMC but that
otherwise generally comply with FNMA or FHLMC requirements) and other loans that
do not comply with FNMA or FHLMC requirements but that do comply with
requirements for sale to private investors. It is the Company's policy to obtain
a title insurance policy on every mortgage loan. In addition, substantially all
of the Company's originated loans are first mortgage loans. During the fourth
quarter of fiscal 1995, the Company did introduce a second mortgage loan program
for which the originated loans will be sold to private investors.
29
<PAGE>
Markets and Competition
- -----------------------
Through the National Mortgage News, the Mortgage Bankers Association
estimates that mortgage loan originations for calendar year 1995 to reach $654
billion and $765 billion for calendar year 1996. The loan origination market
share is somewhat diversified with several large players and many small players.
As a whole, the industry is incorporating technology and pursuing point of sale
strategies to generate mortgage loan originations. The Company believes that it
is more technologically advanced than most of its peers with the exception of a
few of the largest industry players. The Company also believes that its strategy
for implementing its technology and strategy for point of sale originations is
unique and will allow it to compete even with its largest competitors.
Regulation
- ----------
The Company's mortgage banking business is subject to the rules and
regulations of FHA, VA, FNMA, FHLMC and GNMA with respect to originating,
processing, selling, and servicing mortgage loans. Those rules and regulations,
among other things, prohibit discrimination, provide for inspections and
appraisals, require credit reports on prospective borrowers and fix maximum loan
amounts, and with respect to VA loans, fix maximum interest rates. Moreover, FHA
lenders such as the Company are required annually to submit to the Federal
Housing Commissioner audited financial statements. FNMA, FHLMC and GNMA require
the maintenance of specified minimum net worth levels (which vary depending on
the amount of the portfolio serviced by the Company). As of March 31, 1996, the
Company had fallen below the minimum net worth requirements of GNMA and FHA and
is attempting to raise additional equity capital so as to come into compliance
with these net worth requirements. The Company is subject to examination by the
Federal Housing Commissioner at all times to assure compliance with the FHA
regulations, policies and procedures. Mortgage origination activities are
subject to the Equal Credit Opportunity Act, Federal Truth-in-Lending Act and
the Real Estate Settlement Procedures Act and the regulations promulgated
thereunder which prohibit discrimination and require the disclosure of certain
basic information to mortgagors concerning credit and settlement costs.
Additionally, there are various state laws and regulations affecting the
Company's mortgage banking operations. The Company is licensed as a mortgage
banker or retail installment lender in those states in which it does business
that requires such a license.
Conventional mortgage operations may also be subject to state usury
statutes. FHA and VA loans are exempt from the effect of such statutes.
Portfolios purchased from RTC historically have had higher delinquency rates.
This has increased the delinquency rates of AFIM's servicing portfolio. Most
investors, in particular FNMA, FHLMC, and GNMA, have very specific requirements
30
<PAGE>
regarding delinquencies. Once the servicer reaches those thresholds the servicer
is required to reduce their delinquency percentage before any additional
acquisitions will be approved by the affected investor. The Company has no such
restrictions by any investor on the purchase and transfer of servicing.
Higher delinquency ratios may adversely affect the Company's cash flow and
profitability. Higher delinquency rates, depending on the type of loans being
serviced, may require the Company to continue to pass through principal and
interest payments to the investor owning the loan. Although recoverable, this
would require the Company to use its cash to advance such payments. The Company
currently has in place $500,000 of financing available to make such advances.
Higher delinquency ratios also require additional personnel to administer
collection procedures which increases its cost of servicing.
Other Operations
- ----------------
On July 1, 1994, the Company purchased for $10,000 the outstanding shares
of Network Appraisal Associates, Inc. (Network). Network was previously an
unrelated appraisal company providing services to AFI branch offices and other
mortgage banking companies in the Northwest region. The operations of Network
have been included in the consolidated financial statements for fiscal 1995 but
were not material to these statements. However, in the first quarter of fiscal
1996, the Company made the economic decision to discontinue operations of
Network.
On August 1, 1994, the Company purchased 100% of the stock of Century Real
Estate of Lincoln, Nebraska. The acquisition was planned as a short term
investment which allowed for deployment of some of the first Desktop terminals
in a closely monitored real estate brokerage environment. Effective December 20,
1994, the Company sold this temporary investment in Century and concurrently
through a stock exchange purchased 10% of the real estate brokerage company
which purchased Century. The combination of Century and the acquiring real
estate brokerage created the largest real estate brokerage in the Lincoln,
Nebraska market. Also, as part of the sale, AFI has the right to install its
Desktop Mortgage Loan Origination system in all four of the real estate offices
in the Lincoln area.
Employees
- ---------
The Company currently has 65 employees in its originations area, 17 in its
servicing area and 16 in its administrative and finance area. The servicing
division has a key employee, with 20 years experience and an additional 10
employees with 5 to 10 years experience.
31
<PAGE>
Legal Proceedings
- -----------------
In March, 1994, the Company was named as a co-defendant in a lawsuit filed
by two former officers of the Company. The lawsuit, filed in the United States
District Court for the District of Nebraska, alleges that the Company violated
securities laws, delaying the ability of these former officers from selling
common stock of the Company owned by them, resulting in alleged losses of
$300,000. The validity of the stock owned by these plaintiffs is the subject of
concurrent litigation pending in the state court in Omaha, Nebraska. The parties
to the litigation are currently negotiating the terms of a proposed settlement.
No definitive settlement has been agreed upon.
Facilities
- ----------
The only type of real estate in which the Company has invested is the
office building described above. The Company manages its own property and the
financing of said property is as described above. The Company has not adopted
any policies which would limit the number or amount of mortgages which may be
placed on any piece of property owned by the Company. The Company presently has
no plans to purchase or invest in real estate except for its headquarters
building as described above. There are no limitations on the percentage of
assets of the Company which may be invested in any one investment, or type of
investment. Any investment policy of the Company may be changed without a vote
of security holders.
MANAGEMENT
Officers and Directors
The following sets forth certain information with respect to the
officers and directors of the Company.
NAME AGE POSITION
Norman L. Peterson 55 Chairman of the Board,
Treasurer, Director
William E. Moffatt 43 President and
President of AFI
Mortgage Corp.
William B. Morris 38 Secretary, Director
32
<PAGE>
Steven J. Peterson 29 Sr. Vice President,
Director
Mark J. Peterson 33 Vice President,
Director
Deborah K. Towery 33 Chief Financial
Officer
Thomas S. Lilley 45 Director
James L. Mullin, II 31 Director
Patrick E. Elgert 47 Director
Thomas G. Schleich 35 Director
The directors of the Company are elected to hold office until the next
annual meeting of shareholders and until their respective successors have been
elected and qualified. Officers of the Company are elected by the Board of
Directors and hold office until their successors are elected and qualified. The
Company currently has a standing audit committee of its Board of Directors. All
persons who were directors during the year ended March 31, 1996 attended at
least 75% of all the meetings.
Norman L. Peterson. Mr. Peterson has been an officer and director of the
Company since June, 1988. Mr. Peterson is, and has been since 1984, president of
Peterson and Sons Holding Company, a financial consulting company. From 1982 to
1984, he invested in and operated several small businesses in Lincoln, Nebraska.
From 1979 to 1980 he founded, operated and then sold a company that collected
accounts receivables. From 1974 to 1979, he was a senior officer, director and
stockholder of the holding company that owned Platte Valley Bank and Trust
Company. From 1963 to 1973, he was employed by Lincoln Production Credit
Association where he was a branch manager from 1966 to 1973.
William B. Morris. From 1991 to the present, Mr. Morris has been Secretary,
Treasurer and a Director of the Company and has also been involved in a
partnership with Mr. Norman L. Peterson, under the name Lancaster Partners, to
consult with small to mid- sized companies on raising capital and becoming
publicly traded. From 1984 to 1989, Mr. Morris was an account executive at the
investment banking firm of Stuart James & Company, and from 1983 to 1984 Mr.
Morris was an account executive at the venture capital brokerage firm R.B.
Marich, Inc. in Denver, Colorado.
33
<PAGE>
Steven J. Peterson. Mr. Peterson attended Rice University where he received
a Master of Business Administration in May, 1992. In 1989, he graduated Magna
Cum Laude from Nebraska Wesleyan University with a Bachelor of Science degree in
finance. From 1989 to the present, he has served as secretary/treasurer for
Peterson & Sons Holding Company, a family owned company. In 1990, Mr. Peterson
was the principal director of a small retail brokerage operation. Mr. Peterson
has been a director of Continental Mortgage, Inc. since graduating from Rice. He
is the son of Norman L. Peterson.
Deborah K. Towery. Ms. Towery graduated from Auburn University in 1985 with
a B.S. degree in Business Administration and became a Certified Public
Accountant in 1986. From 1993 to present she has been the Chief Financial
Officer for the Company. From 1992 to 1993, she was a financial analyst for
Midland Loan Services, LP and previously was the Chief Financial Officer for
South Trust Mobile Services, Inc. (wholly-owned subsidiary of SouthTrust Bank of
Alabama). From 1985 through 1989, she worked for KPMG Peat Marwick, in
Birmingham, Alabama, as an incharge auditor and manager.
Mark J. Peterson. Mr. Peterson attended law school at the University of
Nebraska where he graduated with a Juris Doctorate in May, 1988. He earned a
Bachelor of Science degree from Nebraska Wesleyan University in 1985. Mr.
Peterson worked part-time as a law clerk and is now an associate with the law
firm of Erickson & Sederstrom, P.C. in Omaha, Nebraska. Mr. Peterson is the son
of Norman L. Peterson.
Thomas S. Lilley. Mr. Lilley joined the Company in 1992 with 20 years
experience in the banking business. Most recently Mr. Lilley was employed by
First National Bank of Shawnee where he was Chief Financial Officer. He is
experienced in the areas of portfolio management, asset/liability management,
and personnel management. Mr. Lilley earned a Bachelor of Science degree in
Biology/PreDental, with equivalent minors in Journalism, Chemistry, and Spanish
from Baker University.
James L. (Lenny) Mullin, II. Mr. Mullin graduated from Emporia State
University with a degree in speech communication in 1986. Since 1986 he has been
continuously involved in real estate in Kansas City. He is a land developer,
home builder and real estate broker. He has extensive holdings in residential
rental property that he also manages. He is a member of the National Association
of Realtors, Kansas Association of Realtors, Johnson County Board of Realtors,
National Association of Homebuilders, and the Greater Kansas Homebuilders
Association.
34
<PAGE>
Patrick E. Elgert. Mr. Elgert graduated from the University of Nebraska in
1971 with a Business Degree. Mr. Elgert was a Senior Vice President with the
Company from 1994 to 1996. From 1990 to the 1994 Mr. Elgert was President and
Co-Owner of Coldwell Banker Century Realty in Lincoln, Nebraska and from 1986 to
1990 he was involved in real estate development and insurance. From 1976 to
1981, he was Vice President of Columbus Federal Savings and Loan, where he was
responsible for development of the Retail Mortgage Division. From 1971 to 1976,
he was Vice President of State Federal Savings & Loan and was responsible for
mortgage loan originations and Branch Manager.
Thomas G. Schleich. Mr. Schleich graduated from Nebraska Wesleyan
University in 1985 with a B.S. degree in Business Administration. He graduated
from the University of Nebraska law school in 1988 with a J.D. degree. From 1989
to 1993 he was president of Commercial Investment Properties in Lincoln,
Nebraska. From 1993 to the present he has been the Chief Operating Officer of
Home Real Estate in Lincoln, Nebraska. In addition to being a member of the
Nebraska State Bar Association, he is also licensed by the State of Nebraska as
a Real Estate Broker.
William E. Moffatt. William E. Moffatt is President of the Company's
wholly-owned subsidiary AFI Mortgage Corp. He received a BBA degree in
accounting/marketing from the University of Texas at Austin in 1975. From 1989
to 1995 he was Executive Vice- President/Capital Markets of Plaza Home Mortgage
Corporation in Santa Ana, California where he was responsible for all functions
of secondary marketing, shipping and product development. He has also been
employed with numerous other mortgage companies, including First Northern Bank
in Garden City, New York from 1988 to 1989 (Senior Vice President/Secondary
Marketing), Liberty Mortgage Company in Oklahoma City, Oklahoma from 1987 to
1988 (Senior Vice President/Loan Production), Commonwealth Mortgage Corp. of
America in Houston, Texas from 1986 to 1987 (Vice President/Secondary Marketing
and National Refinance), and Colwell Financial Corp. in Los Angeles, California
from 1984 to 1986 (Senior Vice President/Administration).
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid by
the Company in each of the last three years to the Chief Executive Officer. No
executive officer had total compensation in excess of $100,000, except Mr.
Peterson.
35
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
----------------------
Annual Compensation(1)(2) Awards Payouts
------------------------- ------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name
and
Princi- Other
pal Annual Restricted All Other
Posi- Compen- Stock Options/ LTIP Compen-
tion Salary($) Bonus($) sations($) Award(s)($) SARs(#) Payouts($) sation($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
Norman L. March 31,
Peterson 1996 $120,000 -0- 2,500 -0- 25,000 -0- -0-
Chairman
of the Year Ended
Board March 31,
President 1995 $120,000 -0- -0- -0- -0- -0- -0-
and Chief
Executive
Officer Year Ended
March 31,
1994 $120,000 -0- 16,000(3) -0- 25,000 -0- -0-
</TABLE>
(1) Amounts shown set forth all cash compensation earned by each of the named
individual in the years shown.
(2) While the named individual received perquisites or other personal benefits
in the years shown, in accordance with applicable regulations, the value of
these benefits are not indicated since he did not exceed in the aggregate the
lesser of $25,000 or 25% of the individual's salary and bonus in any year.
(3) Paid in the form of consulting fee to Peterson & Sons Holding Company.
<TABLE>
<CAPTION>
OPTIONS/SAR GRANTS IN YEAR ENDED MARCH 31, 1996
(a) (b) (c) (d) (e)
% of Total
Options/
SARs
Granted to
Options/SARs Employees Exercise or Base
Name Granted (#) in Fiscal Year Price ($/Sh) Expiration Date
- ---- ------------ -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
W. Ray Bell 25,000 8.80% 0.81 06/30/96
James L. Mullin II 25,000 8.80% 0.81 12/01/00
Thomas Schleich 25,000 8.80% 0.81 12/01/00
Thomas Lilley 25,000 8.80% 0.81 12/01/00
Mark J. Peterson 25,000 8.80% 0.81 12/01/00
Steven J. Peterson 25,000 8.80% 0.81 12/01/00
Norman Peterson 25,000 8.80% 0.88 12/01/00
William B. Morris 25,000 8.80% 0.88 12/01/00
Patrick E. Elgert 25,000 8.80% 0.81 12/01/00
Patrick E. Elgert 9,000 3.17% 1.12 09/01/06
Deborah K. Towery 2,500 0.88% 1.25 06/30/06
Deborah K. Towery 2,500 0.88% 0.81 01/01/07
------ -----
239,000
36
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISED IN YEAR ENDED MARCH 31, 1996
AND OPTION/SAR VALUES AS OF MARCH 31, 1996
(a) (b) (c) (d) (e)
Values of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End(#) at FY-End($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise(#) Value Realized($) Unexercisable Unexercisable
- ---- -------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
Norman L.
Peterson -0- -0- 137,500/12,500 $7,062.50
William B.
Morris -0- -0- 137,500/12,500 $7,062.50
Steven J.
Peterson -0- -0- 137,500/12,500 $7,062.50
Thomas S.
Lilley -0- -0- 22,500/12,500 $7,062.50
Patrick E.
Elgert -0- -0- 31,500/12,500 $9,357.50
James L.
Mullin -0- -0- 12,500/12,500 $7,062.50
Deborah
Towery -0- -0- 5,000/2,500 $7,062.50
Thomas G.
Schleich -0- -0- 12,500/12,500 $7,062.50
W. Ray Bell -0- -0- 12,500/12,500 $7,062.50
</TABLE>
Compensation of Directors
- -------------------------
Directors receive a fee of $250 for board meetings attended and are
reimbursed for expenses incurred in attending such meetings.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
- -------------------------------------------------------------------------
The Company has not entered into any employment contracts with any
executive officer of the Company except for William E. Moffatt. His employment
agreement is for an initial term of one year and specifies a base salary of
$165,000. In addition, he has been granted options to acquire 450,000 shares of
the common stock of the Company at an exercise price of $1.00 per share. Such
options vest in equal monthly amounts over the initial 12 months of the
agreement. The Company has not entered into any contract with any executive
officer with respect to the resignation, retirement or any other termination of
such executive officers employment with the Company or its subsidiary or from a
change-in-control of the Company or a change in any executive officer's
responsibility following a change-in-control.
37
<PAGE>
CERTAIN TRANSACTIONS
On September 30, 1993 the Company entered into a contractual arrangement
known as a participation agreement with Peterson & Sons Holding Company to
participate in approximately $38,000,000 of servicing rights originated by
Continental Mortgage, Inc. prior to September 30, 1993. The transaction was
valued at $290,000 and was paid for by exchanging 51,627 shares of Advanced
Financial, Inc. common stock. Peterson & Sons Holding Company is 50% controlled
by Mark J. Peterson and 50% by Steven J. Peterson, both of whom are directors of
the Company and sons of Norman L. Peterson, President and Director of the
Company. Under the terms of these agreements, the participants received a
portion (generally 75%) of the underlying cash flows resulting from the
Company's servicing of certain identified mortgage loans. For purposes of the
agreements, cash flow is defined as gross revenues (service fees and ancillary
income) less a contractually pre-determined cost to service the loans. If the
underlying servicing is sold by the Company, the participants receive their
pro-rata portion of the sale proceeds. The Company does not guarantee the
participants a rate of return on their investment, and the Company has no
contractual obligation to repurchase the participant's interest.
These participation agreements are recorded as obligations. To determine an
interest rate on the obligation, the Company estimates the future cash flows to
be paid to the participants and discounts those estimated future cash flows at a
rate so that their present value equals the amount paid by the participant.
Interest expense is recorded on the accrual method, and actual payments to the
participants are applied to reduce the Company's recorded obligation. If
estimates of future cash flows to be paid to participants change, the effective
interest rate is revised and interest expense is adjusted, as necessary, on a
prospective basis.
During fiscal 1995 and 1994, the Company repaid obligations under
participation agreements by either selling the underlying servicing and
remitting the participant's portion of the proceeds from sale, or by settling
the remaining obligation with Company funds. The underlying servicing relating
to Peterson & Sons participation agreements was sold for $243,000, with $163,000
being remitted and the remaining $80,000 was recorded as a non-interest bearing
payable on the financial statements of the Company as of March 31, 1995.
The underlying servicing relating to Lancaster Partners participation was
sold for $178,600 with $49,500 being remitted during the year and the remaining
balance of $128,100 being recorded as a non-interest bearing payable on the
financial statements of the Company at March 31, 1995.
On August 1, 1994, the Company purchased Century Real Estate Central, Inc.
("Century") of Lincoln, Nebraska from Patrick E.Elgert, an officer and director
of the Company, and his brother, for Twenty Dollars. In addition the Company
borrowed $211,685 from an unaffiliated bank and used to pay liabilities of
Century that had been guaranteed by Mr. Elgert in the approximate amount of
$250,000.
38
<PAGE>
On December 20, 1994, the Company sold its Century Realty Central, Inc.
Lincoln, Nebraska subsidiary to Home Real Estate Service of Lincoln, Inc.
("Home") for $250,000, consisting of $50,000 cash and a non-interest bearing
promissory note for $200,000. The promissory note is payable in 36 monthly
installments with the entire balance due January 1, 1998. The note is unsecured
but is guaranteed by Austin Realty, Inc., whose vice president is Mr. Schleich.
The Company owns 10% of the issued and outstanding common stock of Home. The
family of Thomas G. Schleich, a director of the Company, controls Home. In
addition, the Company pays to Home monthly rental of $4,000 for the use of three
offices in the Lincoln, Nebraska area.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of June 30, 1996 by: (i) each director; (ii)
each executive officer named in the Summary Compensation Table; (iii) all
executive officers and directors of the Company as a group; and (iv) all those
known by the Company to be beneficial owners of more than five percent of its
Common Stock.
Beneficial Ownership (1)
------------------------
Number of Percent of
Beneficial Owner Shares Total
- ---------------- ------ -----
Peterson & Sons
5425 Martindale
Shawnee, KS 66218 887,462(2) 22.9%
William B. Morris
5425 Martindale
Shawnee, KS 66218 756,263(3) 18.8%
Mark J. Peterson
770 N. Cotner, #402
Lincoln, NE 68505 887,462(4) 22.9%
Norman L. Peterson
5425 Martindale
Shawnee, KS 66218 1,073,010(5) 26.7%
39
<PAGE>
Lancaster Partners
5425 Martindale
Shawnee, KS 66218 267,600(6) 6.9%
Steven J. Peterson
5425 Martindale
Shawnee, KS 66218 1,026,016(7) 25.6%
Thomas S. Lilley
5425 Martindale
Shawnee, KS 66218 32,500(8) less than
one percent
James L. Mullin, II
5425 Martindale
Shawnee, KS 66218 12,500(9) less than
one percent
Patrick E. Elgert
5425 Martindale
Shawnee, KS 66218 31,500(9) less than
one percent
Thomas G. Schleich
225 N. Cotner #107
Lincoln, NE 68505 75,000(10) 1.9%
Deborah Towery
5425 Martindale
Shawnee, KS 66218 5,250(11) less than
one percent
All Executive officers
and directors as a group
(7 persons) 1,360,477(12) 35.1%
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Securities and
Exchange Commission (the "Commission"). Unless otherwise indicated in the
footnotes to this table and subject to community property laws where applicable,
each of the stockholders named in this table has sole voting and investment
power with respect to the shares indicated as beneficially owned.
(2) Includes 267,600 shares controlled by Peterson & Sons Holding Company as 50%
partners of Lancaster Partners, which owns 267,600 shares. Peterson & Sons
Holding Company is 76% controlled by Mark J. Peterson, an officer and director
of the Company, his brother, Steven J. Peterson, and Norman L. Peterson, the
President and a director of the Company, and the father of Mark J. Peterson and
Steven J. Peterson.
(3) Includes 351,163 shares owned personally and 267,600 shares controlled by
William B. Morris as 50% partner of Lancaster Partners which owns 267,600. Also
includes options to purchase 137,500 shares of common stock.
(4) Consists of 887,462 shares controlled by Peterson & Sons Holding Company.
Peterson & Sons Holding company is 24% owned by Mark J. Peterson.
(5) Includes 887,462 shares controlled by Peterson & Sons Holding Company.
Norman L. Peterson disclaims all beneficial ownership in such shares. Also
includes option to acquire 137,500 shares.
(6) Lancaster Partners is 50% owned by William B. Morris and 50% owned by
Peterson & Sons Holding Company.
40
<PAGE>
(7) Includes 887,462 shares controlled by Peterson & Sons Holding Co. Also
includes options to purchase 137,500 shares of common stock. Peterson & Sons
Holding Company is 24% owned by Steven J. Peterson.
(8) Includes options to purchase 22,500 shares of common stock.
(9) Consists entirely of options to purchase common stock.
(10) Includes 62,500 shares of common stock held by Home Real Estate Service of
Lincoln, Inc., a private corporation controlled by the family of Mr. Schleich.
Also includes options to purchase 12,500 shares of common stock.
(11) Includes options to purchase 5,000 shares of common stock.
(12) Includes only shares actually issued and outstanding.
Section 16(a) of the Securities Exchange Act of 1934 and the related
regulations require the Company's directors, executive officers and persons who
own more than ten percent of the Company's Common Stock to file with the
Securities and Exchange Commission and the American Stock Exchange initial
reports of their beneficial ownership of the Company's Common Stock and other
equity securities of the Company. In addition, such persons are required to
furnish the Company with copies of all such filings.
To the Company's knowledge, based solely upon a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended March 31, 1996, all Section
16(a) filing requirements applicable to its directors, executive officers and
ten percent beneficial owners were complied with.
<TABLE>
<CAPTION>
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
Percentage
Ownership Shares Ownership Owned
Selling Prior To Being After After
Stockholder Offering Offered Offering Offering
- ----------- -------- ------- -------- --------
<S> <C> <C> <C> <C>
Pyramid Holdings, Inc.(1) 250,000 250,000 -0- 0%
Cored Capital Corporation(1) 250,000 250,000 -0- 0%
Affiliated Services, Inc.(1) 250,000 250,000 -0- 0%
Ocean Marketing Corporation(1) 250,000 250,000 -0- 0%
</TABLE>
(1) Consists of shares underlying options. Cored Capital Corporation has
exercised 130,000 of its options and Ocean Marketing Corporation has
exercised all of its options.
The Selling Shareholders have advised the Company that sales of the Common
Stock may be made by one or more of them from time to time in transactions in
the open market, in negotiated transactions or a combination of such methods of
sale, at fixed prices which may be changed, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. The Selling Shareholder may effect such transactions by
selling the Common Stock or through broker-dealers, acting as principal or
agent, who may themselves dispose of the Common Stock in transactions on the
American Stock Exchange. The broker-dealers may receive compensation in the form
of discounts, concessions or commissions from Selling Shareholders or the
purchasers of the Common Stock for whom the broker-dealers act they may act as
agent or to whom they sell as principal or agent or both (which compensation as
to a particular broker-dealer might be in excess of customary commissions). The
Company is not aware of any agreement or arrangement between or among the
Selling Stockholders for the sale or other disposition of the securities owned
by them.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
The authorized capital stock of the Company consists of 25,000,000 shares
of $.001 par value Common Stock and 10,000,000 shares of $.005 par value
Preferred Stock. As of June 30, 1996, there were currently outstanding 3,875,476
shares of Common Stock, no shares of Series A Preferred Stock and 372,000 shares
of Series B Preferred Stock.
Common Stock
All shares of the Company's Common Stock have equal voting rights, and,
when validly issued and outstanding, entitle the holder to a single vote per
share on all matters to be voted upon by shareholders. Cumulative voting in the
election of Directors is not allowed. This means that holders of more than 50%
of the shares voting for directors can elect 100% of the directors if they
choose to do so; and, in such event, holders of the remaining less than 50% of
the shares voting for directors will not be able to elect any person or persons
to the Board of Directors.
Holders of the Company's Common Stock are entitled to receive dividends
when and as declared by the Company's Board of Directors from available funds,
property or shares of the Company's Common Stock. The Company has not paid or
declared any cash dividends since its inception and presently anticipates that
all earnings except for payment of preferred stock dividends, if any, will be
retained for development of the Company's business, and that no cash dividends
of its Common Stock will be declared in the foreseeable future. Any future
dividends will be subject to the discretion of the Company's Board of Directors
and would depend, among other things upon future earnings, the operating and
financial condition of the Company, its capital requirements, and general
business conditions. There can be no assurance that any cash dividends on the
Company's Common Stock will be paid in the future.
Shares of the Company's Common Stock have no pre-emptive or conversion
rights, nor redemption or sinking fund provisions, and are not liable to further
call or assessment. The outstanding shares of the Company's Common Stock are,
and any shares issued pursuant to conversion of Series B Preferred Stock or
exercise of Class B Warrant will be, fully paid and nonassessable. Each share of
the Company's Common Stock in entitled to share ratably in any assets available
for distribution to holders of its equity securities upon liquidation of the
Company.
42
<PAGE>
Series A Preferred Stock
On May 2, 1989, the Board of Directors adopted a resolution designating
12,500,000 shares of the authorized preferred stock to be Series A Preferred
Stock. In October of 1991, all 10,000,000 shares of the issued and outstanding
Series A Preferred Stock were converted to 200,000 Common Shares (adjusted to
reflect a one for ten reverse stock split which occurred in December of 1991)
and, accordingly, there are presently no Series A Preferred shares issued and
outstanding. Management has no present intention to issue any Series A Preferred
stock now or in the foreseeable future.
Series B Preferred Stock
Dividend Provisions. The holders of the Series "B" Preferred Stock shall be
entitled to receive, when and as declared by the Board of Directors out of funds
for the Company legally available therefore, cumulative cash dividends at the
annual rate equaling 10.5% of the purchase price paid to the Company for such
Series "B" Preferred Stock. Such dividends shall be payable quarterly on the
10th day of April, July, October and January in each year from the date of
issuance of such shares of Series "B" Preferred stock. If the dividend on the
Series "B" Preferred Stock for any dividend period shall not have been paid or
set apart in full for such Series "B" preferred stock, in the aggregate
deficiency shall be cumulative and shall be fully paid or set apart for payment
before any dividend shall be paid or set apart for payment of any class or
common stock of the Company. Accumulation of dividends of the Series "B"
Preferred Stock shall not bear interest. There are currently 372,000 shares of
10.5% Series "B" Preferred Stock issued and outstanding. The payment of such
dividends by the Company has been in default since January of 1996.
Right to Convert. One share of Series "B" Preferred Stock shall be
convertible, at the option of the holder thereof, into one fully paid and
non-assessable share of the Company's Common Stock.
Redemption of Series "B" Convertible Preferred Stock. The Series "B"
Preferred Stock shall be redeemable, in whole or in part, at the option of the
Company by resolution of its Board of Directors, at any time and from time to
time upon payment of one share of the Company's Common Stock for each share of
Series "B" Preferred Stock so redeemed, plus all dividends accrued and unpaid on
such Series "B" Preferred Stock up to the date fixed for redemption. Provided,
however, that the Company's right to redeem the Series "B" Preferred Stock shall
be subject to the requirement that the Company's Common Stock must have had a
minimum reported bid price of $5.75 per share for twenty consecutive trading
days prior to notice of redemption as described below.
43
<PAGE>
In the event of any redemption of only part of the then outstanding Series
"B" Preferred stock, the Company shall effect such redemption pro rata among the
holders of outstanding share thereof according to the respective number of
shares of each class held by such holders.
Voting Rights. Except as otherwise required by law, the holders of Series
"B" Preferred stock will not be entitled to any voting rights. Unless the vote
or consent of the holders of greater number of shares is required by law, the
consent of the holders of at least a majority of all issued and outstanding
Series "B" Preferred Stock shall be required to change, alter or revoke the
rights and preferences conferred upon the Series "B" Preferred stock by the
Certificate of Incorporation or to adopt an amendment to the Certificate of
Incorporation adversely affecting the rights of the holders of Series "B"
Preferred Stock.
Priority of Series "B" Preferred Stock in the Event of a Dissolution. In
the event of any liquidation, dissolution or winding up of the affairs of the
Company, whether voluntary or otherwise, after payment or provision for payment
of debts and the liabilities of the Company, the holders of Series "B" Preferred
Stock shall be entitled to receive, out of the net assets of the Company, the
amount of the purchase price paid to the Company upon the original issuance of
the Series "B" Preferred Stock, in cash for each share of Series "B" Preferred
Stock, plus an amount equal to all dividends accrued and unpaid on each such
share up to the date fixed for distribution before any distribution shall be
made to the holders of any class of Common Stock of the Company.
Warrants
There are currently issued and outstanding 400,000 Class B Warrants (the
"Class B Warrants"). Each Class B Warrant will entitle the holder thereof to
purchase at a price of $10.00 at any time, one share of Common Stock. The
Company reserves the right, at any time after the bid price of the Common Stock
is at least 115% of the exercise price of the respective B Warrant for a period
of at least 10 consecutive business days, to call any or all of such Warrants
(but not less than the entire class of Warrants) upon 30 days' written notice to
warrantholders at a redemption price of $0.001. If the Warrants are called, they
will expire and will be of no further value if they are not exercised by the
holders on or before the call date. However, the Company will not redeem the
Warrants unless a current registration statement is in effect. The Company, in
its sole discretion may extend the expiration date of Warrants and/or reduce the
exercise price of the Warrants.
The Warrants were issued under a Warrant Agreement (the "Warrant
Agreement") dated June 4, 1992, between the Company and Interwest Transfer Co.,
Inc.
44
<PAGE>
In order for a holder to exercise the Warrants there must be a current
registration statement in effect with the United States Securities and Exchange
Commission and the various state commissions relating to the shares of Common
Stock underlying the Warrants or an opinion of counsel for the Company that no
registration is required. The Company will be required to file post-effective
amendments or a new registration statement. There is no assurance that the
registration statement or a new registration statement can be kept current. The
registration statement of which this prospectus is a part updates the
registration statement previously filed at the time the Class B Warrants were
originally issued. If it is not kept current for any reason, the Warrants will
not be exercisable and may be deprived of any value. In addition, if the Common
Stock underlying the Warrants is not qualified for sale in the state in which a
Warrantholder resides, such holder will not be permitted to exercise the
Warrants and will have no choice but to either sell his Warrants or let them
expire.
Warrantholders may be diluted by the issuance of additional shares of
Common Stock in the future and are protected against dilution of their interest
represented by the underlying shares of Common Stock only upon the occurrence of
stock splits, capital reclassification and mergers and sales of the Company's
assets. Warrantholders have no voting power, are not entitled to dividends, and
have no other rights generally conferred on shareholders. In the event of
liquidation, dissolution or winding up of the Company, Warrantholders are not
entitled to participate in the Company assets.
Exercise of Warrants. The Warrants may be exercised on surrender of the
applicable Warrant certificate on or prior to expiration of the applicable
Warrant exercise period, with the form of "Election to Purchase" on the reverse
side of the certificate executed as indicated, and accompanied by payment of the
full exercise price for the number of Warrants being exercised. Payment must be
by certified funds or cashier's check payable to the order of the Warrant Agent.
Transfer and Warrant Agent
The transfer agent and warrant agent for the Company is Interest Transfer
Co., Inc., P.O. Box 17136, Salt Lake City, Utah 84117.
LEGAL MATTERS
The legality of the securities being offered by this Prospectus in
connection with the laws governing corporations in the State of Colorado have
been passed upon for the Company by the law firm of Allen G. Reeves, P.C., 900
Equitable Bldg., 730 17th Street, Denver, Colorado 80202.
45
<PAGE>
INDEMNIFICATION
Delaware Statutes provide for indemnification of the officers and directors
of the Company against certain liabilities incurred in connection with their
activities on behalf of the Company. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to the Company or
directors, officers or persons controlling the Company under such
indemnification provisions, the Company has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
EXPERTS
The financial statements of Advanced Financial, Inc. as of and for the
years ended March 31, 1996 and 1995 included herein and elsewhere in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
authority of said firm as experts in accounting and auditing. In July of 1996,
the Company and KPMG Peat Marwick LLP mutually agreed to terminate their
professional relationship. Pursuant to such mutual decision, KPMG Peat Marwick
LLP resigned as certifying accountant on July 15, 1996. For the Registrant's
most recent year end financial statements, for the years ended March 31, 1996
and 1995, KPMG Peat Marwick LLP rendered an audit opinion letter modified as to
an uncertainty as follows:
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern.
As discussed in note 2 to the consolidated financial
statements, the Company has incurred net losses of
$3,184,577 and $3,963,497 during the years ended March 31,
1996 and 1995. These losses, along with other matters as set
forth in note 2, raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard
to these matters are also described in note 2. The
consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
At the time KPMG Peat Marwick LLP resigned, there were no disagreements
between Registrant and KPMG Peat Marwick LLP on any matter of accounting
principles or practices, financial statement disclosure, or audit scope of
procedures, which disagreements if not resolved to their satisfaction, would
have caused them to make reference to the subject matter of the disagreement in
connection with their reports.
46
<PAGE>
<TABLE>
<CAPTION>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 1996 and March 31, 1996
Assets
------
June 30, 1996 March 31, 1996
------------- --------------
(unaudited)
<S> <C> <C>
Cash and investments $ -- 585,643
Mortgage servicing advances and accounts receivable 530,826 520,620
Property and equipment, net 1,645,012 1,718,355
Mortgage loans held for sale 13,708,717 10,110,747
Mortgage loans held for investment 87,324 94,932
Purchased mortgage servicing rights, net 2,022,119 2,440,280
Excess of cost over fair value of assets acquired, net 512,120 524,798
Prepaid expenses 150,975 191,442
Deferred income taxes 440,000 440,000
Other investment 221,542 235,800
Receivable from related party 65,000 190,000
Other 297,267 260,899
---------- ----------
Total assets $ 19,680,902 17,313,516
============ ==========
Liabilities
-----------
Accounts payable and accrued expenses $ 2,373,071 2,507,103
Checks outstanding in excess of bank balance 194,537 -
Settlement liabilities on purchased mortgage
Notes payable 16,338,905 13,412,419
Capitalized lease obligations 358,190 415,665
------------ ----------
Total liabilities $ 19,264,703 16,335,187
------------ ----------
Stockholders' Equity
--------------------
Preferred stock, Series B, $.005 par value.
10,000,000 shares authorized; 372,000
shares issued and outstanding 1,860 1,860
Common stock, $.001 par value. 25,000,000
shares authorized; 4,125,476 shares issued
and outstanding 4,256 4,256
Paid-in capital 8,877,493 8,877,493
Deficit (8,026,065) (7,463,935)
---------- ----------
857,544 1,419,674
Treasury stock, 99,869 shares of common
stock at cost (441,345) (441,345)
----------- ----------
Total stockholders' equity 416,199 978,329
----------- ----------
Total liability and stockholders' equity $ 19,680,902 17,313,516
============ ==========
See accompanying notes to condensed consolidated financial statements.
F-1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the three month periods ended
June 30, 1996 and June 30, 1995
June 3O, 1996 June 3O, 1995
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Servicing fee income $ 528,960 635,451
Other fee income 183,690 236,021
Gain on sale of mortgage loans 694,112 513,968
Gain on sale of servicing rights - 99,759
Interest income 240,280 100,953
Other income 15,443 14,043
--------- ---------
Total operating revenues 1,662,485 1,600,195
--------- ---------
Expenses:
Servicing expense 139,581 313,830
Personnel 1,019,983 867,581
General and administrative 398,791 457,558
Interest expense 222,189 153,301
Depreciation and amortization 373,548 450,427
Loss on sale of servicing rights 13,482 -
Other 57,041 44,852
--------- ---------
Total operating expenses 2,224,615 2,287,549
--------- ---------
Loss before income taxes (562,130) (687,354)
Income tax (expense) benefit - -
--------- ---------
Net loss (562,130) (687,354)
======== ========
Weighted average shares outstanding 3,819,563 3,775,600
========= =========
Loss per common share:
Primary $ (0.15) (0.19)
========= =========
Fully diluted $ (0.15) (0.19)
========= =====
See accompanying notes to condensed consolidated financial statements.
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ADVANCED FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
For the three month periods ended June 30, 1996 and June 30, 1995
June 30, 1996 June 30, 1995
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Net cash (used in) provided by operating activities $ (3,864,476) (7,508,946)
Cash fows from investing activiies:
Acquisition of property and equipment 27,272 1,275
Proceeds/(Acquisition) of mortgage servicing rights 216,049 -
Sale of real estate owned - 15,512
Acquisition/Principal payments on mortgage
loans held for investment,net 7,608 3,196
------------ -----------
Net cash provided by (used in)
investing activiies 250,928 19,983
Cash flows from fnancing activities:
Notes payable, net 2,926,486 6,878,903
Checks outstanding in excess of bank balance 194,537 199,807
Payments on capitalized lease obligations (93,118) (62,843)
Payment of peferred dividends - (39,060)
------------ -----------
Net cash provided by (used in)
financing activities 3,027,905 6,976,807
Net decrease in cash (585,643) (512,156)
Cash at beginning of period 585,643 512,156
------------ -----------
Cash at end of period $ 0 0
============ ===========
Supplemental disclosures of cash flows:
Cash paid for interest $ 203,103 153,301
Cash paid for income taxes $ - -
Supplemental disclosures of noncash
financing and investing activities:
Property acquired under capital leases $ - 24,592
Receivable recognized for exercise of stock options $ 65,000 -
See accompanying notes to condensed consolidated financial statements.
F-3
</TABLE>
<PAGE>
ADVANCED FINANCIAL, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996 and 1995
(1) Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
The Company's financial statements include the accounts of Advanced
Financial, Inc. (the Company) and its wholly-owned subsidiary AFI
Mortgage Corp, formally Continental Mortgage, Inc. (AFI Mortgage). AFI
Mortgage is a full service mortgage banking company currently servicing
first and second mortgage loans of approximately $438,744,000 as of June
30, 1996.
The condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-QSB. To the extent that
information and footnotes required by generally accepted accounting
principles for complete financial statements are contained in or
consistent with the audited financial statements incorporated by
reference in the company's Form 10-KSB for the year ended March 31,
1996, such information and footnotes have not been duplicated herein. In
the opinion of management, all adjustments considered necessary for fair
presentation of financial statements have been reflected herein. The
March 31, 1996 condensed consolidated balance sheet has been derived
from the audited balance sheet as of that date.
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Advanced Financial, Inc.
and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Advanced
Financial, Inc. and subsidiaries as of March 31, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
and subsidiaries as of March 31, 1996 and 1995 and the results of their
operations and their cash flows for the years then ended.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the Company has incurred net losses of
$3,184,577 and $3,963,497 during the years ended March 31, 1996 and 1995. These
losses, along with other matters as set forth in note 2, raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG Peat Marwick LLP
Kansas City, Missouri
June 30, 1996
F-5
<PAGE>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1996 and 1995
Assets 1996 1995
------ ---- ----
Cash $ 585,643 512,156
Mortgage servicing advances and
accounts receivable 520,620 1,283,907
Mortgage loans held for sale (note 5) 10,110,747 2,351,912
Mortgage loans held for investment 94,932 136,524
Purchased mortgage servicing rights,
net (notes 3 and 5) 2,440,280 3,534,450
Property and equipment, net
(notes 5, 7 and 11) 1,718,355 1,982,517
Excess of cost over fair value of
assets acquired, net of accumulated
amortization of $235,899 and $185,185,
respectively 524,798 575,512
Prepaid expenses 191,442 294,431
Deferred income taxes (note 10) 440,000 490,000
Other investment (note 12) 235,800 297,378
Receivable from related party (notes 2 and 9) 190,000 -
Other (note 13) 260,899 337,225
----------- ----------
Total assets $17,313,516 11,796,012
=========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 2,507,103 1,712,899
Amounts due to related parties (note 6) - 207,709
Notes payable (note 5) 13,412,419 5,155,636
Capitalized lease obligations (note 7) 415,665 675,113
----------- ----------
Total liabilities 16,335,187 7,751,357
----------- ----------
Stockholders' equity (notes 2, 8 and 9):
Preferred stock, Series B, $.005
par value 10,000,000 shares authorized;
372,000 shares issued 1,860 1,860
Common stock, $.001 par value; 25,000,000
shares authorized; 3,875,476 shares issued 4,256 3,876
Paid-in capital 8,877,493 8,642,442
Deficit (7,463,935) (4,162,178)
---------- ----------
1,419,674 4,486,000
Treasury stock, 99,869 shares of
common stock at cost (441,345) (441,345)
---------- ----------
Total stockholders' equity 978,329 4,044,655
Commitments and contingencies(notes 8 and 13)
Total liabilities and stockholders'
equity $17,313,516 11,796,012
=========== ==========
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended March 31, 1996 and 1995
1996 1995
---- ----
Revenues:
Servicing fees $ 2,466,646 3,293,878
Gains on sales of mortgage loans, net
(including origination fee income of
$891,932 and $412,297, respectively) 2,531,580 515,478
Other fees 1,009,685 985,759
Gains on sales of mortgage servicing rights 99,759 383,443
Interest 639,458 204,735
Other 144,200 97,906
----------- -----------
Total operating revenues 6,891,328 5,481,199
----------- -----------
Expenses:
Servicing expense 1,420,763 1,285,843
Personnel 3,789,712 3,576,031
General and administrative 2,239,103 2,298,834
Interest 721,281 485,338
Depreciation and amortization 1,485,192 1,860,926
Other 370,504 788,492
----------- -----------
Total operating expenses 10,026,555 10,295,464
----------- -----------
Loss before income taxes (3,135,227) (4,814,265)
Income tax expense (benefit) (note 10) 49,350 (850,768)
----------- -----------
Net loss $(3,184,577) (3,963,497)
=========== ===========
Weighted average shares outstanding 3,776,000 3,726,000
=========== ===========
Loss per common share $ (.88) (1.11)
=========== ===========
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the years ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
Preferred Common Paid- Treasury
stock stock in capital Deficit stock Total
----- ----- ---------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 $1,860 3,803 8,550,390 (42,441) (442,450) 8,071,162
Net loss - - - (3,963,497) - (3,963,497)
Issuance of 62,500 shares of
common stock in exchange
for other investment - 63 73,687 - - 73,750
Issuance of 10,250 shares of
common stock in exchange
for services rendered - 10 18,365 - 1,105 19,480
Dividends on preferred stock,
$.42 per share - - - (156,240) - (156,240)
------ ----- --------- ---------- -------- -------
Balance at March 31, 1995 1,860 3,876 8,642,442 (4,162,178) (441,345) 4,044,655
Net loss - - - (3,184,577) - (3,184,577)
Services rendered in exchange
for stock options - - 45,431 - - 45,431
Exercise of stock options
(notes 2 and 9) - 380 189,620 - - 190,000
Dividends on preferred stock,
$.32 per share (note 2) - - - (117,180) - (117,180)
------ ----- --------- ---------- -------- -------
Balance at March 31, 1996 $1,860 4,256 8,877,493 (7,463,935) (441,345) 978,329
====== ===== ========= ========== ======== =======
See accompanying notes to consolidated financial statements.
F-8
</TABLE>
<PAGE>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended March 31, 1996 and 1995
1996 1995
---- ----
Cash flows from operating activities:
Net loss $(3,184,577) (3,963,497)
Adjustments to reconcile net loss to
net cash from operating activities:
Depreciation and amortization 1,485,192 1,860,926
Gains on sale of mortgage loans held-for-sale (2,531,580) (515,478)
Gains on sales of mortgage servicing rights (99,759) (383,443)
Common stock issued in exchange for
services rendered - 19,480
Deferred income taxes 50,000 (831,476)
Services rendered in exchange for
stock options 45,431 -
Mortgage loans held-for-sale originated (111,090,000) (36,371,000)
Mortgage loans held-for-sale sold 105,862,745 37,929,332
Changes in assets and liabilities:
Mortgage servicing advances and
accounts receivable 763,287 2,446,634
Prepaid expenses and other assets 121,384 533,876
Accounts payable and accrued expenses 686,254 979,889
Interest related to participations - 30,463
Income taxes receivable - 311,983
---------- ---------
Net cash (used in) provided by
operating activities (7,891,623) 2,047,689
---------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (32,060) (40,885)
Acquisition of subsidiary - (10,000)
Other investment - (223,628)
Purchase of mortgage servicing rights (11,172) (1,657,472)
Proceeds from sale of foreclosed asset 57,931 -
Proceeds from sales of mortgage servicing rights - 1,209,710
Principal payments received on note receivable 61,578 -
Principal payments received on mortgage loans
held for investment 41,593 139,384
---------- ---------
Net cash provided by (used in)
investing activities 117,870 (582,891)
---------- ---------
Cash flows from financing activities:
Change in revolving borrowings, net 7,726,195 (3,047,668)
Proceeds from notes payable 984,399 1,184,897
Principal payments on notes payable (453,811) (157,538)
Principal payments on participation agreements - (488,004)
Payments on capitalized lease obligations (292,363) (218,651)
Payment of preferred dividends (117,180) (156,240)
---------- ---------
Net cash provided by (used in)
financing activities 7,847,240 (2,883,204)
---------- ---------
Net increase (decrease) in cash 73,487 (1,418,406)
Cash at beginning of year 512,156 1,930,562
--------- ---------
Cash at end of year $ 585,643 512,156
========= ========
(Continued)
F-9
<PAGE>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
1996 1995
---- ----
Supplemental disclosures of cash
flow information:
Cash paid for interest $ 608,293 485,338
========== =======
Cash refund of taxes $ - (332,110)
========== ========
Supplemental disclosures of noncash
financing and investing activities:
Stock issued in exchange for
other investment $ - 73,750
========== =======
Acquisition of fixed assets
financed by capital leases $ 66,686 148,947
=========== =======
Receivable recognized for exercise
of stock options (notes 2 and 9) $ 190,000 -
=========== =======
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996 and 1995
(1) Organization and Summary of Significant Accounting Policies
(a) Organization and Principles of Consolidation
Advanced Financial, Inc. (the Company) owns 100% of AFI Mortgage, Corp.
(AFI). AFI originates, sells to investors and services residential first
mortgage loans. The Company also owns 100% of Continental Mortgage
Services, Inc. (CMSI) and Network Appraisals, Inc. (Network). CMSI and
Network provided consulting and appraisal services to AFI and other
mortgage banking companies. During the fiscal year ended March 31, 1996,
both of those subsidiaries became inactive.
The consolidated financial statements include the accounts of the Company,
AFI, CMSI and Network. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications of prior year
amounts have been made so as to conform to the current presentation.
(b) Mortgage Servicing Rights and Mortgage Servicing Advances Receivable
Purchased mortgage servicing rights are recorded at cost and are amortized
in proportion to and over the estimated positive future cash flows derived
from servicing the portfolio. The Company evaluates the recoverability of
the cost of each bulk purchase of servicing rights or, in the case of
correspondent purchases, by grouping such servicing rights by interest
rates and purchase dates of similar loans. If necessary, the Company
further disaggregates bulk purchases for purposes of evaluating
recoverability if the underlying loans do not have similar underlying
economic characteristics. The Company estimates remaining net cash flows to
be received from servicing the portfolio and if such amounts, on a
discounted basis, are less than amortized cost, appropriate amortization
adjustments are made. This additional amortization, when required, results
in servicing rights being carried at the lower of cost or market. Gains on
sales of mortgage servicing rights are determined by deducting from the
selling price the remaining unamortized cost of such servicing rights.
In connection with servicing mortgage-backed securities guaranteed by
federal agencies, the Company advances certain principal and interest
payments to security holders prior to their collection from specific
mortgagors. In addition, the Company will make certain payments of property
taxes and insurance premiums in advance of collection from specific
mortgagors, as well as certain payments of attorneys' fees and other costs
related to loans in foreclosure. Such advances are included in mortgage
servicing advances receivable.
(c) Mortgage Loans Held for Sale and Investment
Mortgage loans held for sale are carried at the lower of cost or market as
determined by outstanding commitments from investors or current investor
yield requirements calculated on the aggregate basis. Gains or losses on
sales of mortgage loans are recognized based upon the difference between
the selling price and the carrying value of the related mortgage loans sold
at the date of sale using the specific identification method. Mortgage
loans held for investment are carried at the lower of cost or market on the
date of acquisition or transfer from the held for sale account.
(d) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on
the straight-line method over the estimated useful lives of the assets,
ranging from three to thirty years.
F-11
<PAGE>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 1996 and 1995
(1) Organization and Summary of Significant Accounting Policies (Continued)
(e) Excess of Cost Over Fair Value of Assets Acquired
The excess of cost over fair value of assets acquired, resulting from the
Company's acquisition of AFI, is being amortized over fifteen years. The
Company periodically evaluates the recoverability of its recorded goodwill
based on the estimated undiscounted future cash flows.
(f) Foreclosed Assets
Foreclosed assets, included in other assets in the accompanying
consolidated balance sheets, are recorded at the lower of the loan balance
or the fair value of the property less estimated selling costs.
(g) Servicing and Other Fees
Servicing fees represent fees earned for servicing mortgage loans owned by
investors. These fees are calculated on the outstanding principal balances
of the loans serviced and are recorded as income when collected.
Other fees consist of ancillary income associated with loan servicing and
are recorded as income when collected.
(h) Income Taxes
The Company accounts for income taxes under the asset and liability method
where deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates applied to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. Deferred tax assets are
recognized to the extent management believes that it is more likely than
not that they will be realized.
(i) Loss Per Common Share
Loss per common share is based on the weighted average number of common
shares outstanding during the periods plus common stock equivalents, when
dilutive, consisting of stock options and warrants. For purposes of this
computation, net losses have been adjusted for the dividends on the
preferred stock. The computation of fully diluted loss per share includes
the common stock issuable upon conversion of preferred stock, when
dilutive. Because the effect of such inclusion is anti-dilutive in 1996 and
1995, fully diluted per share information is not presented herein.
(j) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
(k) Effect of New Financial Accounting Standards
The Company adopted SFAS No. 114 and 118, Accounting by Creditors for
Impairment of a Loan, as amended, on April 1, 1995. This statement requires
the accounting by creditors for impairment of certain loans. The impact of
adopting the statement on the Company's consolidated financial statements
was not material.
F-12
<PAGE>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 1996 and 1995
(1) Organization and Summary of Significant Accounting Policies (Continued)
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," will be effective for the Company on
April" 1, 1996 and requires that certain long-lived assets be reviewed for
impairment when events or circumstances indicate that the carrying amounts
of the assets may not be recoverable. If such review indicates that the
carrying amount of an asset exceeds the sum of its expected future cash
flows, the assets carrying value is written down to fair value. Long-lived
assets to be disposed of are reported at the lower of carrying amount or
fair value less cost to sell. Management has not determined the impact of
adopting this statement on the Companys consolidated financial statements.
SFAS No. 122, "Accounting for Mortgage Servicing Rights," will be effective
for the Company on April 1, 1996 and requires that the total cost of
mortgage loans originated or acquired be allocated to the loan and the
related servicing right based on their relative fair values. Costs
allocated to mortgage servicing rights will be recognized as a separate
asset and amortized over the period of estimated net servicing income and
periodically evaluated for impairment based on fair value. The adoption of
this statement is not expected to have a material effect on the Companys
1997 consolidated financial statements because the Company intends to sell
originated loans servicing released during fiscal 1997.
SFAS No. 123, "Accounting for Stock-Based Compensation," will be adopted by
the Company during fiscal 1997. This statement establishes financial
accounting and reporting standards for stock-based employee compensation
plans including stock option plans. This statement will require pro forma
disclosures in 1997 of net income and earnings per share as if a new
accounting method based on the estimated fair value of employee stock
options had been adopted. The Company has not decided if the optional
accounting treatment proposed by SFAS No. 123 will be adopted.
(2) Operating Losses
The Company has experienced operating losses for the years ended March 31,
1996 and 1995 of $3,184,577 and $3,963,497, respectively, and stockholders
equity has declined from $8,071,162 on April 1, 1994 to $978,329 at March
31, 1996. While the Companys stockholders equity at March 31, 1996 is
sufficient to satisfy requirements of those financial institutions
purchasing loans from the Company, further declines might result in the
loss of rights to sell loans to those investors. Additionally, AFI is not
in compliance with minimum net worth requirements of the Government
National Mortgage Association (GNMA) and Federal Housing Administration
(FHA). Furthermore, as discussed more fully in note 5, the Company
obtained waivers for noncompliance with certain required debt covenants at
March 31, 1996 and its principal source of credit matures on August 16,
1996. These conditions raise substantial doubt about the Companys ability
to continue in operation for the foreseeable future and, therefore, its
ability to realize its assets and discharge its liabilities in the normal
course of business.
The Company intends to increase or preserve its stockholders equity and
achieve profitability as follows:
The Company suspended the payment of dividends on its preferred stock,
which carries a 10.5% cumulative dividend rate, in January 1996. Total
unpaid cumulative dividends at March 31, 1996 is $78,120.
As more fully described in note 9, the Company has entered into
consulting agreements wherein stock options to acquire 1,000,000
shares of the Companys common stock were granted in February 1996.
Options to acquire 380,000 shares were exercised subsequent to March
31, 1996, and has been reflected as a receivable from related party
and an increase to stockholders equity of $190,000 in the accompanying
1996 financial statements. Management expects the remaining options to
be exercised in the second quarter of 1997, thereby increasing
stockholders equity by an additional $310,000.
F-13
<PAGE>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 1996 and 1995
2. Operating Losses (Continued)
Management has entered into an agreement to sell the servicing rights
to approximately $260 million of its servicing portfolio. The sale was
consummated in the first quarter of fiscal 1997 and will result in a
gain. Cash proceeds of approximately $2,300,000 will be used to repay
indebtedness. Management is currently evaluating the possible sale of
the remaining servicing rights. In connection with these sales,
management intends to reduce operating expenses and focus on the
origination and sale of loans and associated servicing rights.
Management believes that the above steps will allow the Company to meet its
obligations and maintain financial balances and ratios required by its
lenders and investors. However, there are no assurances that those steps
will ultimately be successful. The financial statements do not include any
adjustments relating to recoverability of recorded asset amounts or to
amounts of liabilities that may be necessary if the Company is unable to
continue as a going concern.
(3) Mortgage Servicing Rights
Purchased mortgage servicing rights are presented net of accumulated
amortization of $3,326,547 and $2,221,205 at March 31, 1996 and 1995,
respectively. A summary of the activity related to purchased mortgage
servicing rights is as follows at March 31, 1996 and 1995:
1996 1995
---- ----
Balance at beginning of year $3,534,450 5,740,532
Purchases 11,172 63,059
Scheduled amortization (1,010,047) (1,442,874)
Amortization due to impairmen (95,295) -
Sales - (826,267)
---------- ---------
Balance at end of year $2,440,280 3,534,450
========== =========
(4) Mortgage Banking Activities
The Company's portfolio of mortgage loans serviced for investors, including
loans originated by the Company, aggregated approximately $481,000,000 and
$527,000,000 at March 31, 1996 and 1995, respectively. Included in the
portfolio at March 31, 1996 and 1995 is approximately $188,000,000 and
$221,000,000, respectively, of GNMA mortgage-backed securities (see note
2). Under terms of the guarantee agreement with GNMA, the Company is
required to advance principal and interest not collected from the mortgagor
and is liable for amounts lost in foreclosure of defaulted loans not
recovered from the loans' insurers.
At March 31, 1996 and 1995, escrow funds related to the serviced loans
approximated $12.5 million and $13.5 million, respectively, and are not
included in the accompanying consolidated balance sheets. Included in
servicing expense are foreclosure losses of $728,703 and $387,397 at March
31, 1996 and 1995, respectively.
At March 31, 1996, the Company had commitments to originate $25.0 million
of mortgage loans of which approximately $12.1 million is at predetermined
rates. Additionally, at March 31, 1996, the Company had mandatory
commitments to deliver mortgage-backed securities aggregating approximately
$7 million.
AFI carries blanket bond coverage of $950,000 and errors and omissions
coverage of $950,000 at March 31, 1996.
F-14
<PAGE>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 1996 and 1995
(5) Notes Payable
The following summarizes the Company's notes payable at March 31, 1996 and
1995:
1996 1995
---- ----
Borrowings under a $17,000,000 line of
credit, secured by mortgage loans and
mortgage servicing rights, interest at
Federal Funds rate plus 2.5% (7.5% and 8.25%,
respectively), due August 16, 1996 $10,591,644 2,409,577
Borrowings under a $500,000 warehouse line of
credit, secured by mortgage loans, interest
at prime plus 1% (10%), repaid October 1,
1995 - 455,872
Borrowings under a $1,000,000 line of credit,
secured by mortgage servicing rights,
interest at 9.75%, monthly payments of
$20,517 with final payment due July 1, 1999 727,559 891,910
Note payable, secured by mortgage servicing
rights, interest at 8.25%, with monthly
payments of $7,020 and final payment of
$546,575 due January 1, 1996 534,069 579,975
Note payable, secured by real estate,
interest at 8%, with monthly payments of
$6,197 and final payment of $572,494 due
October 1, 1996 589,848 614,118
Note payable, secured by stock and note
receivable, interest at prime plus 1% (10%),
with monthly installments of $5,556 and final
payment of $163,047, repaid January 1, 1996 - 204,184
Note payable, secured by stock, interest at
9.5%, with payment due June 1, 1996 43,399 -
Note payable, secured by note receivable,
interest at 9.5%, with monthly installments
of $5,556, with final payment due January 1,
1998 111,752 -
Note payable, secured by furniture and
fixtures, interest at prime plus 2% (10.25%),
with monthly installments of $1,389, with
final payment due February 27, 2001 64,148 -
Note payable, secured by real estate and
mortgage servicing rights, interest only at
prime plus 4% (12.25%), with payment of
$150,000 due September 30, 1996 and final
payment of $200,000 due March 29, 1998 350,000 -
Note payable, secured by servicing rights,
interest only at prime plus 4% (12.25%), with
final payment of $400,000 due September 30,
1996 400,000 -
----------- ---------
$13,412,419 5,155,636
=========== =========
F-15
<PAGE>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 1996 and 1995
(5) Notes Payable (Continued)
Substantially all of the Company's mortgage loans held for sale, mortgage
loans held for investment and servicing rights (both purchased and
originated), and property and equipment are pledged to secure the notes
payable.
Scheduled maturities of long-term debt, including borrowings under lines of
credit, are:
1997 $12,562,918
1998 468,581
1999 237,414
2000 129,000
2001 14,506
-----------
$13,412,419
===========
The Companys $17 million line of credit described above contains
restrictive covenants which, among other things, requires AFI to maintain
stockholders equity of at least $2.25 million and meet certain cash flow
ratios, as defined by the lending agreement. AFI obtained waivers for
noncompliance with these covenants at March 31, 1996. This line matures
August 16, 1996 at which time management expects it to be renewed, although
there is no assurance to that effect. Additionally, certain other
indebtedness, aggregating $534,069 at March 31, 1996, matured during the
fourth quarter of fiscal 1996. The Company expects to satisfy such
indebtedness with the sale of servicing rights (see note 2).
(6) Participation Agreements
Prior to 1995, the Company entered into contractual arrangements known as
participation agreements with both related and unrelated parties. Under the
terms of those agreements, the participants received a portion (generally
75%) of the underlying cash flows resulting from the Company's servicing of
certain identified mortgage loans. For purposes of the agreements, cash
flow was defined as gross revenues (service fees and ancillary income) less
a contractually pre-determined cost to service the loans. If the underlying
servicing was sold by the Company, the participants received their pro-rata
portion of the sale proceeds. The Company did not guarantee the
participants a rate of return on their investment, and the Company had no
contractual obligation to repurchase the participants' interests.
Amounts received by the Company from the parties to the participation
agreements were recorded as obligations under participation agreements. To
determine an interest rate on the obligation, the Company estimated the
future cash flows to be paid to the participants and discounted those
estimated future cash flows at a rate so that their present value equaled
the amount paid by the participant. Interest expense was recorded on the
accrual method, and actual payments to the participants were applied to
reduce the Company's recorded obligation. If estimates of future cash flows
to be paid to participants changed, the effective interest rate was revised
and interest expense was adjusted, as necessary, on a prospective basis.
During fiscal 1995, the Company repaid obligations under participation
agreements by either selling the underlying servicing and remitting the
participants' portion of the proceeds from sale, or by settling the
remaining obligation with Company funds. The Company recorded a noninterest
bearing account payable of approximately $269,000 as of March 31, 1995, of
which $207,709 was due to related parties, for the participants pro-rata
portion of the settlement proceeds and, therefore, no remaining obligation
under participation agreements existed at March 31, 1995. These payables
were settled in August 1995.
F-16
<PAGE>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 1996 and 1995
(6) Participation Agreements (Continued)
The following table summarizes the participation activity during the fiscal
year ended March 31, 1995:
Related parties Unrelated parties
--------------- -----------------
Balance at March 31, 1994 $ 211,138 246,403
Amounts borrowed under
participation agreements - -
Accrual (refund) of interest (9,120) 39,583
Payments or payable to participants (202,018) (285,986)
----------- ---------
Balance at March 31, 1995 $ - -
=========== ========
Effective interest rate:
During the year -% 25
End of year - -
(7) Capitalized Lease Obligations
The Company has entered into various capital lease agreements, relating
primarily to computer equipment and furniture. The future lease payments as
of March 31, 1996 are as follows:
Year Amount
---- ------
1997 $ 260,403
1998 173,375
1999 13,815
----------
Total future lease payments 447,593
Less amounts representing
interest at rates ranging
from 7% to 10%31,928 31,928
----------
$ 415,665
==========
The Company has entered into various operating lease agreements for branch
locations. The operating lease expense for fiscal 1996 and 1995 was
approximately $283,000 and $77,000, respectively. Most of the operating
leases are short-term in nature. Management expects to renew most of such
leases in the normal course of business and, accordingly, future
commitments under operating leases is not expected to be less than 1996.
(8) Capital Stock
On June 4, 1992, the Company completed the offering of 400,000 units at an
offering price of $4 per unit. In connection with the offering, the Company
issued warrants to acquire 40,000 units to the underwriter. The
underwriter's warrants are exercisable until June 1, 1997 at an exercise
price of $6.60. Each unit consisted of one share of Series B preferred
stock, one Class A warrant and one Class B warrant. The preferred stock
bears a 10.5% cumulative dividend rate, and is redeemable at the option of
the Company upon payment of one share of common stock plus all unpaid
dividends. The Class A warrants entitled the holder to purchase one share
of the Company's common stock for $3.50 until December 4, 1993, at which
time the warrants expired. The Class B warrants entitle the holder to
purchase one share of the Company's common stock for $10 until December 4,
1996, at which time they expire. The warrants are redeemable at the option
of the Company, at which time the holders of the warrants may exercise
their right to acquire common stock as described above.
F-17
<PAGE>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 1996 and 1995
(8) Capital Stock (Continued)
On March 29, 1993, the Company completed the offering of 900,000 shares of
common stock at an offering price of $4.25 per share. In addition, the
Company issued warrants to acquire 100,000 shares of common stock to the
underwriter. The warrants are exercisable until March 29, 1998 at an
exercise price of $5.95.
On September 2, 1994, the Company issued 10,000 shares of common stock
valued at $1.87 per share (market value at the date of the transaction), in
exchange for professional services performed for the Company. Additionally,
on December 20, 1994, the Company issued 62,500 shares of common stock
valued at $1.18 per share (market value on the date of the transaction), in
exchange for a 10% interest in Home Real Estate Services of Lincoln, Inc.
(Home) (see note 12).
(9) Stock Option Plans
The Company has key employee option and incentive stock option plans.
Options to acquire common stock are granted, at fair market value, on the
date of grant and expire in 2001 through 2006; 2,000,000 shares of common
stock have been reserved for issuance under the plans. The following
schedule sets forth information regarding option activity under these
plans:
Number Option price
------ ------------
Outstanding at March 31, 1994 540,750 $4.00-4.25
Granted 77,400 1.31-2.25
Canceled (16,250) 1.50-4.25
-------
Outstanding at March 31, 1995 601,900 1.31-4.25
Granted 663,991 .81-1.25
Canceled (12,000) 1.31-4.25
-------
Outstanding at March 31, 1996 1,253,891 .81-4.25
---------
As of March 31, 1996, 796,000 of the above options were exercisable.
On February 15, 1996, the Company entered into consulting agreements with
four companies. Under the terms of each agreement, the Company is to be
provided with financial and public relations services, including advice
concerning marketing surveys, investor profile information, methods of
expanding investor support and increasing investor awareness of the Company
and its products and services. The term of each consulting agreement is six
months, commencing on February 15, 1996. As compensation for each
consultants services, the Company has granted options to purchase 1,000,000
shares of common stock to the consultants at an exercise price of $.50 per
share. Such options expire during fiscal 1997. The Company received
approximately $45,000 in consulting services during 1996, which has been
reflected as an expense and an increase in paid-in capital in the
accompanying balance sheet. Options to acquire 380,000 shares were
exercised subsequent to March 31, 1996, and has been reflected as a
receivable from related party and an increase to stockholders equity of
$190,000 in the accompanying 1996 financial statements.
F-18
<PAGE>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 1996 and 1995
(10) Income Taxes
The components of income tax expense (benefit) for the years ended March
31, 1996 and 1995 are as follows:
1996 1995
---- ----
Current $ - (19,292)
Deferred 49,350 (831,476)
------- --------
$49,350 (850,768)
======= ========
Federal $40,517 (698,935)
State 8,833 (151,833)
------- --------
$49,350 (850,768)
======= ========
The reasons for the difference between actual income tax expense (benefit)
and expected income tax benefit at the statutory federal income tax rate
(34%) are as follows:
1996 1995
---- ----
Expected income tax benefit
at statutory rate $(1,065,977) (1,636,850)
State income taxes, net (140,094) (226,849)
Amortization of excess cost over
fair value of assets acquired 17,242 18,010
Change in valuation allowance 1,183,660 1,064,755
Other, net 54,519 (69,834)
------------ ---------
Actual income tax expense (benefit $ 49,350 (850,768)
============ =========
The tax effects of temporary differences that give rise to the significant
portions of the deferred tax assets and liabilities at March 31, 1996 and
1995 are as follows:
1996 1995
---- ----
Deferred tax assets:
Net operating loss carryforward $1,893,261 1,346,715
Valuation reserves 165,579 30,600
Basis difference in purchased
mortgage servicing rights 343,481 51,494
Deferred state taxes 307,535 193,255
Other 2,383 7,356
---------- ---------
Total deferred tax assets 2,712,239 1,629,420
Valuation allowance (2,052,741) (869,081)
---------- ---------
Net deferred tax assets 659,498 760,339
---------- ---------
Deferred tax liabilities:
Basis difference in excess cost
over fair value of assets acquired (178,432) (195,674)
Basis difference in fixed assets (37,330) (37,495)
Deductible prepaid expenses (3,664) (30,537)
Other (72) (6,633)
---------- --------
Total deferred tax liabilities (219,498) (270,339)
---------- --------
Net deferred tax asset $ 440,000 490,000
========== ========
F-19
<PAGE>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 1996 and 1995
(10) Income Taxes (Continued)
The Company has net operating loss carryforwards of approximately $5.6
million as of March 31, 1996. These net operating losses will expire in the
years ended March 31, 2009 through March 31, 2011.
Total deferred tax assets of $2,712,239 consist primarily of the benefit of
the net operating loss carryforward. Management has established a valuation
allowance of $2,052,741 to reduce the total deferred tax asset to an amount
which management believes will, more likely than not, be realized. As of
March 31, 1996, the Company has no recoverable income taxes previously
paid. In determining the amount of the valuation allowance, management has
relied on a tax-planning strategy whereby management intends, if necessary,
to sell its purchased mortgage servicing rights portfolio to allow
realization of the deferred tax asset that has been recognized. An
unrealized gain exists in the Companys purchased mortgage servicing rights
portfolio which may be recognized through the sale of such servicing
rights. Therefore, management believes that it is more likely than not that
the $440,000 deferred tax asset will be realized.
(11) Property and Equipment
Property and equipment consisted of the following at March 31, 1996 and
1995:
1996 1995
---- ----
Land $ 300,000 300,000
Building 905,344 901,288
Furniture and fixtures 387,965 385,046
Office and computer equipment 930,667 1,005,106
Automobile 5,331 5,331
--------- ---------
2,529,307 2,596,771
Accumulated depreciation 810,952 614,254
---------- ---------
$1,718,355 1,982,517
========== =========
(12) Other Investment
The Companys other investment represents a 10% common ownership interest
and a noninterest bearing note receivable, which has been discounted so as
to yield 9% to the Company, from Home, a related party. This investment
results from the issuance of 62,500 shares of the Companys stock and the
sale of substantially all of the assets of Century Realty in December 1994.
Century Realty was purchased from a director of the Company in August 1994
for $20 and the assumption of $210,000 of debt.
Home is a residential real estate brokerage company located in Lincoln,
Nebraska. The Companys investment in Home is accounted for at cost of
approximately $125,000, and the balance of the note receivable at March 31,
1996, which matures on January 1, 1998, was $112,336.
F-20
<PAGE>
ADVANCED FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 1996 and 1995
(13) Contingencies
In March 1994, the Company was named in a lawsuit filed by two former
stockholders and officers of the Company. The lawsuit alleges that the
Company breached an employment contract and violated securities laws,
delaying the ability of these former officers from selling common stock of
the Company owned by them, resulting in alleged losses of $200,000 and
$300,000, respectively. The parties to the litigation are currently
negotiating the terms of a proposed settlement. No definitive settlement
agreement has been agreed upon. Included in other assets at March 31, 1996
is a $214,815 note receivable from one of the former officers which is
unsecured, bears interest at 8% and was due December 30, 1992. The validity
of this note is the subject of concurrent litigation.
In connection with a review of the Companys servicing operation by Federal
Home Loan Mortgage Company (FHLMC), the Company was advised in January 1996
that unreconciled shortages existed in certain bank accounts used to
accumulate funds related to loans serviced by the Company for FHLMC. The
Company was advised that the shortage approximated $600,000 and that such
amounts should either be researched and resolved or otherwise paid by the
Company. Approximately $255,000 of such shortage has been identified and is
reflected in accounts payable and accrued expenses in the Companys
consolidated balance sheet at March 31, 1996. Management believes that the
remaining amount claimed by FHLMC is claimed in error or relates to
servicing performed by previous owners of the servicing rights and is
therefore recoverable from those servicers.
(14) Fair Value of Financial Instruments
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," and
SFAS No. 119, "Disclosure About Derivative Financial Instruments and Fair
Value of Financial Instruments," require that the Company disclose
estimated fair values for its financial instruments. Fair value estimates
have been made as of March 31, 1996 based on the current economic
conditions, risk characteristics of the various financial instruments and
other subjective factors.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to
estimate that value:
Cash and cash equivalents - The carrying amounts approximated fair
value because of the short maturity of these instruments.
Mortgage loans held for sale - The fair values of loans determined by
outstanding commitments from investors or current investor yield
requirements calculated on an aggregate basis.
Mortgage loans held for investment - The carrying amounts approximated
fair value since carried at lower of cost or market.
Note payable - The fair values of the notes payable are estimated
based on discounted values of contractual cash flows using rates
currently available for similar loan types.
The estimated fair value and carrying value of the Companys financial
instruments are as follows at March 31, 1996:
Carrying value Fair value
-------------- ----------
Financial assets:
Cash $585,643 586,000
Mortgage loans held for sale 10,110,747 10,141,000
Mortgage loans held for investment 94,932 95,000
Financial liabilities:
Notes payable 13,412,419 13,441,000
F-21
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses in connection with the
issuance and distribution of the securities being registered. All of the amounts
shown are estimable except the Commission registration fee. Such expenses will
be paid by the Company. None of these expenses will be paid by the Selling
Stockholders.
Registration fee. . . . . . . . . . . . $ 1,379.00
Printing expenses . . . . . . . . . . . $ 1,000.00
Accounting fees and expenses. . . . . . $ 2,000.00
Legal fees and expenses (other than
Blue Sky). . . . . . . . . . . . . . . $15,000.00
Blue Sky fees and expenses. . . . . . . $ 1,000.00
Miscellaneous . . . . . . . . . . . . . $ -0-
Total. . . . . . . . . . . . . . . $20,379.00
Item 14. Indemnification of Directors and Officers.
A. The Delaware General Corporation Law, under which the Registrant is
incorporated, gives a corporation the power to indemnify any of its directors,
officers, employees, or agents who are sued by reason of their service in such
capacity to the corporation provided that the director, officer, employee, or
agent acted in good faith and in a manner he believed to be in or not opposed to
the best interests of the corporation. With respect to any criminal action, he
must have had no reasonable cause to believe his conduct was unlawful.
B. The Company's Certificate of Incorporation provides for indemnification
of officers and directors as follows:
Each person who was or is made a party or is threatened to be made a
party or is involved in any action, suit or proceeding, whether civil, criminal
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he or she, or a person of whom he or she is the legal representative,
is or was a director or officer, of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis of
such proceeding is alleged action in an official capacity as a director,
officer, employee, or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
47
<PAGE>
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorney's fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that except as provided in
paragraph (b) hereof, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
board of directors of the Corporation. The right to indemnification conferred in
this Section shall be a contract right and shall include the right to be paid by
the Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition: provided, however, that, if the Delaware
General Corporation Law requires, the payment of such expenses incurred by a
director or officer in his or her capacity as a director or officer (and not in
any other capacity in which service was or is rendered by such person while a
director or officer, including, without limitation, service to an employee
benefit plan) in advance of the final disposition of a proceeding, shall be made
only upon delivery to the corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Section or otherwise. The Corporation may, by action of its Board of
Directors, provide indemnification to employees and agents of the Corporation
with the same scope and effect as the foregoing indemnification of directors and
officers.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Act, and is, therefore,
unenforceable.
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since April 1, 1993, sales of unregistered securities were made as follows:
NO. OF
DATE SHARES CONSIDERATION
---- ------ -------------
COMMON STOCK 8/13/93 48,000 Services
rendered
8/13/93 7,500 Purchase of
Continental
Mortgage
Services,
Inc.
9/2/94 10,000 Services
rendered
12/20/94 62,500 Purchase of
Home Real
Estate
6/13/96 130,000 Cored
(exercise of Capital
options) Corp.
6/13/96 250,000 Ocean
(exercise of Marketing
options) Corp.
OPTIONS TO PURCHASE COMMON STOCK
NO. OF
NAME DATE SHARES CONSIDERATION
- ---- ---- ------ -------------
Lance Hutchinson 5/3/95 125,000 Marketing services
Butch Gordon 12/1/95 2,500 Consulting services
Cored Capital Corp. 2/15/96 250,000 Consulting services
Affiliated Services 2/15/96 250,000 Consulting services
Pyramid Holdings, Inc. 2/15/96 250,000 Consulting services
Ocean Marketing
Corporation 2/15/96 250,000 Consulting services
First Mortgage
Investment Corp. 3/31/96 100,000 Part of financing
transaction
49
<PAGE>
With respect to the sale of unregistered securities as described above, the
Company relied upon the exemptions afforded by Section 4(2) of the Securities
Act of 1933. None of the sales were made to officers, directors or affiliates.
Each security is restricted, contains a restrictive legend, and requires a legal
opinion as to compliance with Rule 144 before a transfer may take place.
Item 16. Exhibits.
See Exhibit Index filed herewith.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represents a
fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
50
<PAGE>
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's
annual report pursuant to section 13(a) or section 15(d)
of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement
shall be deemed to be a new registration statement
relating to the securities offered therein, and the
offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(5) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the Registrant
pursuant to the foregoing provisions (see Item 15 above),
or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the
securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
51
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Shawnee, Kansas on
August 19, 1996.
ADVANCED FINANCIAL, INC.
By: /s/William E. Moffatt
-----------------------------------
WILLIAM E. MOFFATT
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Norman L. Peterson his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits and schedules thereto, and
all other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully ratifying and confirming all that said attorney-in-fact and
agent or their substitutes or substitute may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Norman L. Peterson
- ------------------------ Chairman, Treasurer,
Norman L. Peterson Director Aug. 19, 1996
/s/William E. Moffatt President, Director Aug. 19, 1996
- -------------------------
/s/William B. Morris Secretary, Director Aug. 16, 1996
- -------------------------
William B. Morris
<PAGE>
Signature Title Date
--------- ----- ----
/s/Steven J. Peterson Sr. Vice President,
- ------------------------- Director Aug. 16, 1996
Steven J. Peterson
/s/Mark J. Peterson Vice President,
- -------------------------- Director Aug. 20, 1996
Mark J. Peterson
/s/Deborah K. Towery Chief Financial Officer,
- -------------------------- Chief Accounting
Deborah K. Towery Officer Aug. 19, 1996
- -------------------------- Director Aug. , 1996
Thomas S. Lilley
- -------------------------- Director Aug. , 1996
James L. Mullin, II
- -------------------------- Director Aug. , 1996
Thomas G. Schleich
<PAGE>
EXHIBIT INDEX
TO
REGISTRATION STATEMENT ON FORM S-1
ADVANCED FINANCIAL, INC.
------------------------
3.1 Certificate of Incorporation of Registrant(1)
3.2 Certificate of Amendment to the Certificate of
Incorporation of Registrant(1)
3.3 Bylaws of Registrant(1)
4.0 Certificate of Designation, Preferences, Rights
and Limitations of Series "B" Proposed Stock(1)
4.1 Specimen Stock Certificate of $.001 par value
common stock(1)
4.2 Form of Class B Warrant(1)
5.1 Proposed Form of Opinion of Counsel regarding legality(1)
10.1 Consulting Agreement between Registrant and Cored
Capital Corporation(1)
10.2 Consulting Agreement between Registrant and Affiliated
Services, Inc.(1)
10.3 Consulting Agreement between Registrant and Pyramid
Holdings, Inc.(1)
10.4 Consulting Agreement between Registrant and Ocean
Marketing Corporation(1)
24.1 Consent of counsel(2)
24.2 Consent of KPMG Peat Marwick, LLP, certified public
accountants(2)
(1) Filed previously.
(2) Filed herewith.
CONSENT OF COUNSEL
The consent of Allen G. Reeves, P.C., of all references made to it in the
Prospectus included as a part of this Registration Statement on Form S-1 of
Advanced Financial, Inc. and in all Amendments thereto are included in its
opinion filed as Exhibit 24.1 to the Registration Statement.
ALLEN G. REEVES, P.C.
By: /s/ Allen G. Reeves
------------------------------------
Allen G. Reeves
Denver, Colorado
August 20, 1996
ACCOUNTANT'S CONSENT
The Board of Directors
Advanced Financial, Inc.
We consent to the use in this Registration Statement of Advanced Financial, Inc.
on Form S-1, of our report dated June 30, 1996 on the consolidated financial
statements of Advanced Financial, Inc. and subsidiaries as of March 31, 1996 and
1995, and for the years then ended, and to the reference to our firm under the
heading "Experts" in the related prospectus.
Our report dated June 30, 1996, contains an explanatory paragraph that states
the Company has incurred net losses of $3,184,577 and $3,963,497 during the
years ended March 31, 1996 and 1995. These losses, along with other matters as
set forth in note 2, raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/KPMG Peat Marwick LLP
----------------------------------
Kansas City, Missouri
August 20, 1996
